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Jack and Jill Hillclimber have grown tired of going to the well to fetch water and are trying to decide if they can afford to take out a second mortgage to install indoor plumbing in their old farm house. Their farm house is worth about $150,000 and the balance on their loan for it is at $80,000. After meeting their obligations they have a disposable income of $18,000 annually. Their total assets (including their house) are worth $500,000 and their total liabilities (including the primary mortgage loan on their home) are $110,000. Using the ratio of debt-to-equity method, what could we say about Jack and Jill's ability to take out the loan for the plumbing work?
0.09 ratio --- ratio is not high at all, they likely would have no problem finding a lender to finance the project
0.45 ratio --- a lender would be crazy to loan them the money
0.30 ratio --- their ratio is on the high end, many lenders would reject, but they may be able to find someone who thinks they will be able to repay that is willing to lend them money at a higher interest rate
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Calculate Hurricane Lamp's degree of combined leverage (DCL) using the The definitional formula (Equation 14.5) and The simpler computational formula (Equation 14.7)
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