Topic_15_E2 - They are often used as techniques to fund...

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Topic 15, Exercise 2 Sales-Leasebacks Many firms are using leasing techniques to improve performance. Leasing offers opportunities to unlock funds tied up in assets and also offers the potential to generate additional cash flows through efficient tax management. The technique of sale-leaseback was used for real estate, but the technique can also be used for other productive assets. Potential benefits of using this technique is described in an article entitled, “Sales- Leasebacks: Benefits and Challenges For Both Healthy and Underperforming Companies,” by Knowledge@Wharton for GE Capital Corp. After reviewing this article, answer the following questions: 1. Leasing transactions—particularly sales-leasebacks—are often labeled as balance sheet mining transactions. What does that mean? Leasing transactions are referred to as balance sheet mining transactions since they are used to free up funds tied up in assets.
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Unformatted text preview: They are often used as techniques to fund growth and improve the performance of underperforming companies. Leasing is an alternative approach for securing financing at favorable terms. 2. What is the potential advantage of having a lease categorized as an operating lease instead of a capital lease? If a sale-leaseback is structured as an operating lease, it may improve a firms statement of financial position, improving ratios and debt capacity. If the transaction qualifies as an operating lease, the leased property can be moved off the balance sheet. 3. What is a synthetic lease? A synthetic lease is structured as an operating lease for financial reporting purposes but is considered a financial or capital lease for tax purposes. It is generally available as an alternative to a true lease but is more difficult to structure for a sale-leaseback....
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This note was uploaded on 09/13/2011 for the course FIN 6301 taught by Professor El-asmawanti during the Fall '09 term at University of Texas at Dallas, Richardson.

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