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

Under a sale and leaseback arrangement, a firm sells an asset it owns to a financier and takes it back on lease. Which statement best describes the principal financing benefit to the firm?

The firm releases cash tied up in the asset while continuing to use it. Sale proceeds are received from the financier, and the firm then pays lease rentals for the asset's use. It does not gain a new asset, convert debt into equity, or obtain government funds.

  1. AIt obtains cash from the asset while continuing to use itCorrect
  2. BIt acquires ownership of a new asset without any payment
  3. CIt converts debt into equity shares
  4. DIt gets tax-free working capital from the government

Explanation

The firm sells the asset, receives the sale proceeds in cash, and keeps using the asset by paying lease rentals. It does not get a new asset, and no debt-equity conversion or government funding is involved.

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