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Some companies sell assets and then lease them back from the company that bought the asset....

Some companies sell assets and then lease them back from the company that bought the asset. How would you explain this in terms of WACC?

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Answer #1

Sale and Leaseback is an uncomplicated financial transaction that allows a firm to lease an asset to itself after selling it. The transaction thus enables a business to be capable of handling the asset without owning it.

An asset purchased on debt can be sold and leased back to reduce the debt and improve balance sheet strength. The liability on the balance sheet will reduce. There will be an increment in current assets in the form of cash and lease agreements. The asset turnover will increase as the fixed assets will diminish but the revenue-generating capacity of the asset will still be in the hands of the company.

The debt component in WACC would go down while the Equity side would increase.

The business which has sold the asset and has it on the lease, does not have to pay tax on any appreciation of the asset and the rent outflow will decrease the profit in the profit and loss statement which will in turn reduce the tax liability.

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