Question

How does a sale-leaseback transaction typically affect a company's Debt-to-Equity (D/E) ratio?

A) It increases the D/E ratio.
B) It decreases the D/E ratio.
C) It has no effect on the D/E ratio.
D) It depends on the terms of the leaseback agreement.

Answer 1

A sale-leaseback transaction typically increases a company's Debt-to-Equity (D/E) ratio.

Step-by-step explanation:

A sale-leaseback transaction is when a company sells an asset (such as a property) to a third party and then leases it back from them. In this transaction, the company receives cash from the sale of the asset and continues to use it through the lease.

Typically, a sale-leaseback transaction increases a company's Debt-to-Equity (D/E) ratio. The reason for this is that the company adds the leaseback liability to its debt, while the proceeds from the sale reduce its equity. This leads to a higher D/E ratio, as debt increases and equity decreases.

So, the correct answer is A) It increases the D/E ratio.