Question

If the debt to asset ratio (solvency) for Sunstone Hotel was 78% in 2017 and 68% in 2018, do you think that the bank would provide a loan to the business? Why?

Answer 1

Here the debt to asset ratio of sunstone hotel for different years are as follows :-

2017 - 78%

2018 - 68%

I think the bank will provide loan to sunstone hotel

The explanation for the above given statement is as follows :-

Here we have to study the components of ratio

Debt to asset ratio =

(short term debt + long term debt) ÷ (total assets )

Here we take an example that a company has $2 debt and $4 of assets then the debt to asset ratio = 2÷4×100 = 50%

Here we got the ratio is 50 %

And the ideal debt to asset ratio is 50%

So here as given in the question the sunstone hotel has debt to asset ratio of 78% in 2018 and 68% in 2018. Here there is decrease in ration . But for that decrease there can be two reasons as follows

1. Increase in debt (getting new loans )

2. Decrease in assets (sale of some assets)

So the changes in ratio is common but bank will study the genuine reason for the changes

Eventhough the ratio varied from year to year it does not came below the ideal rate of 50%.

The rate of debt to asset in both the years are above the ideal rate i.e 78% in 2017 and 68% in 2018. So the bank may give the loan to the hotel.

As per given information and above explanations the debts are never dominated the available assets and all those debts are not even half of the asset available to the hotel so the bank will give the loan hotel.

As per all the above calculations and explanations I think the bank will provide loan to sunstone hotel.

I hope, all the above given points and calculations are useful and helpful to you.

Thank you.