CMA Intermediate · Financial Management and Business Data Analytics · Sources of Finance
In a sale and leaseback arrangement, Rohan Steels sells its plant to a financier and immediately leases it back. Which is the primary financing benefit to Rohan Steels?
The main benefit is that the firm gets cash by selling the plant yet continues using it through the lease. This releases funds locked in fixed assets, though the firm must keep paying rentals to the lessor.
- AIt releases cash tied up in the plant while retaining its useCorrect
- BIt transfers ownership risk of the plant permanently to the firm
- CIt converts the plant into equity shares of the lessor
- DIt removes the need to pay any periodic rentals
Explanation
Sale and leaseback gives immediate cash from the sale while the firm continues to use the asset by paying lease rentals. It does not remove rentals, nor does it give equity in the lessor.
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