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Debt Management in Hospitality
True or false · 10 items · by Гулназ
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Determine whether each statement about managing borrowed funds in hospitality is true or false.
- Borrowed funds refer to capital obtained through loans, bonds, or credit that must be repaid with interest.
- Hotels and restaurants rarely use debt financing because their cash flow is completely steady year-round.
- High leverage means a company relies heavily on debt to finance its operations and asset expansion.
- Interest payments on business loans are generally considered a fixed financial cost regardless of hotel occupancy rates.
- Short-term debt in the hospitality industry is typically used to finance the construction of a brand-new resort.
- The debt-to-equity ratio helps financial managers assess the financial risk of a hospitality enterprise.
- A restaurant can completely ignore interest rates when signing a floating-rate loan agreement.
- Effective working capital management ensures a hotel has enough liquid funds to meet short-term debt obligations.
- Collateral is never required by banks when hospitality businesses apply for large commercial loans.
- Refinancing existing debt can sometimes help a hospitality business secure a lower interest rate or better repayment terms.
Answer key
- Borrowed funds refer to capital obtained through loans, bonds, or credit that must be repaid with interest. → True — Borrowed funds represent liabilities that require scheduled principal and interest repayments.
- Hotels and restaurants rarely use debt financing because their cash flow is completely steady year-round. → False — Hospitality businesses often experience seasonality, making debt management crucial for covering off-season expenses.
- High leverage means a company relies heavily on debt to finance its operations and asset expansion. → True — Financial leverage measures the proportion of debt used relative to equity.
- Interest payments on business loans are generally considered a fixed financial cost regardless of hotel occupancy rates. → True — Fixed costs like loan interest must be paid regardless of how many rooms are booked.
- Short-term debt in the hospitality industry is typically used to finance the construction of a brand-new resort. → False — Long-term debt is used for major capital investments like building resorts, while short-term debt covers working capital.
- The debt-to-equity ratio helps financial managers assess the financial risk of a hospitality enterprise. → True — This ratio compares total liabilities to shareholder equity to evaluate risk levels.
- A restaurant can completely ignore interest rates when signing a floating-rate loan agreement. → False — Floating rates fluctuate with market conditions, meaning interest expenses can unexpectedly increase.
- Effective working capital management ensures a hotel has enough liquid funds to meet short-term debt obligations. → True — Liquidity management is essential to avoid defaulting on short-term liabilities and supplier bills.
- Collateral is never required by banks when hospitality businesses apply for large commercial loans. → False — Lenders usually require physical assets, such as hotel property or equipment, as collateral to secure loans.
- Refinancing existing debt can sometimes help a hospitality business secure a lower interest rate or better repayment terms. → True — Refinancing is a common strategy to optimize debt servicing costs and improve cash flow.
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