A company cannot create value through sale-leaseback transactions.

Question

Quizplus · Accepted Answer

If a company intends to use the asset for its remaining life (by renewing the lease as it expires), then it will create no value. In fact, it will destroy value because the implied cost of the lease would be higher than the cost of borrowing. However, the transaction may create value if the company wants the ability to stop using the asset before its remaining life expires and wants to eliminate the risk that the value of the asset will be lower when it decides to stop using the asset. Sale-leaseback transactions may also create value if the lessor is better able to use the tax benefits associated with owning the asset, such as accelerated depreciation. In this case, value is created as the total cash flows of the company involved have increased (at the expense of the government).

A Company Cannot Create Value Through Sale-Leaseback Transactions