Which of the following statements is/are correct?

Net worth represents the personal equity that the individual has in his assets and can never be less than zero.
If Lisa purchased a car using 30% cash and 70% debt, her net worth would increase by 30%.

Question

Which of the following statements is/are correct?

Net worth represents the personal equity that the individual has in his assets and can never be less than zero.
If Lisa purchased a car using 30% cash and 70% debt, her net worth would increase by 30%.

BlackTom AI · Accepted Answer

To tackle this question, I will evaluate each statement against basic concepts of net worth and personal finance.
Option a: '1 only.' Net worth is defined as total assets minus total liabilities and represents the owner’s equity in their assets. It can be negative if liabilities exceed assets, so the claim that net worth can never be less than zero is incorrect. This makes option a false.
Option b: '2 only.' The statement about Lisa financing 70% of a car with debt would imply a change in net worth. When an asset is acquired with both cash and debt, the asset and the corresponding liability increase by the same amount, leaving net worth (assets minus liabilities) unchanged. Therefore, the assertion that her net worth would increase by 30% is inaccurate, rendering option b false.
Option c: 'Both 1 and 2.' Since both 1 and 2 have been shown to be incorrect, this combined option is also incorrect.
Option d: 'Neither 1 nor 2.' This option accurately reflects that net worth can be negative, and purchasing an asset with a mix of cash and debt does not inherently increase net worth. The logic here aligns with fundamental finance principles: assets minus liabilities determine net worth, and debt financing of a purchase expands both sides of the equation by the same amount, leaving net worth unchanged.
In sum, each earlier statement contains a misconception about net worth behavior in typical scenarios, and the final option correctly captures the nuanced understanding of net worth dynamics.

Which of the following statements is/are correct? Net worth represents the personal equity that the individual has in his assets and can never be less than zero. If Lisa purchased a car using 30% cash and 70% debt, her net worth would increase by 30%.

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