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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

A company arranges a sale and leaseback of a factory it owns. What is the most direct effect at the time of the transaction?

A sale and leaseback releases the cash tied up in the property while the company keeps using the factory. It gives up ownership and takes on lease rentals, so it is a financing method, not an equity issue or a way to avoid payments.

  1. AIt releases cash tied up in the property while retaining the use of the factoryCorrect
  2. BIt increases the company's ownership of the factory
  3. CIt raises new equity capital
  4. DIt removes the company's obligation to make any further payments for the factory
  5. It converts short-term debt into share capital

Explanation

In a sale and leaseback the company sells the asset, receiving cash, and leases it back so operations continue. It gives up ownership and takes on rental obligations. It is not equity issuance and does not remove payments.

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