Faculty & Research
Debt-financing Alternatives
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Vol 43 No 3
By: Anwar R. Elgonemy
Executive Summary: One of the issues in lodging finance is the ratio of debt to equity. Debt can be beneficial, of course, but only up to a point - beyond which the costs of potential financial distress begin to outweigh the benefits of leverage. That is an important issue for investors because debt-to-invested capital affects a hotel's cost of capital and, therefore, the overall value of the property. Before pursuing debt-financing alternatives hotel investors need first to consider four basic elements, namely: 1. business risk, 2. the need for financial flexibility, 3. the degree of ownership's risk aversion, and 4. tax considerations. A hotel investor will borrow because the interest tax shield is valuable. At relatively low debt levels, the probability of financial distress is low, and the benefit from debt outweighs the cost. At very high debt levels, however, the possibility of financial distress is a chronic, ongoing problem for a hotel.
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- Debt-financing Alternatives By: Anwar R. Elgonemy
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