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CA Intermediate · Financial Management and Strategic Management · Types of Financing

Under a sale and leaseback arrangement, a company sells an existing machine to a financier and immediately takes it back on lease. Which of the following is the primary financing purpose of this arrangement?

The main purpose of sale and leaseback is to release funds tied up in an owned asset while continuing to use it. The firm receives sale proceeds and pays lease rentals afterwards. It does not create equity capital or remove payment obligations.

  1. ATo release funds locked up in an asset it continues to useCorrect
  2. BTo acquire a new asset without any payment obligation
  3. CTo transfer the entire ownership risk of the business to the lessor
  4. DTo raise permanent equity capital from the public

Explanation

In sale and leaseback, the firm sells an asset it already owns and leases it back. Cash from the sale is released for working capital or other needs while the asset stays in use. Option B is wrong because lease rentals are a fixed obligation, and option D is wrong because no equity is issued.

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