Capital Structure- Kirsten Neal is interested in purchasing a new house given that mortgage rates are at a historical low. Her bank has specified rules regarding an applicant’s ability to meet the contractual payments associated with the requested debt. Kirsten must submit personal financial data of her income, expenses, and existing instalment loan payments. The bank then calculates and compares certain ratios to predetermined allowable value to determine if it will make the requested loan. The requirements are as flows:
(1) Monthly mortgage payments <28% of monthly gross (before-tax) income.
(2) Total monthly instalment payments (including the mortgage payments) <37% of monthly gross (before taxes) income Kirsten submits the following personal financial data:
3) Monthly Gross before tax income $4,500
4) Monthly instalment loan obligations $375
5) Requested mortgage $150,000
6) Monthly mortgage payments $1,100