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A business owns a $2 million building with a $500,000 mortgage - HSC - SSCE Business Studies - Question 18 - 2022 - Paper 1
Question 18
A business owns a $2 million building with a $500,000 mortgage. They decide to sell the building and lease it back from the new owners over five years. What is the ... show full transcript
Worked Solution & Example Answer:A business owns a $2 million building with a $500,000 mortgage - HSC - SSCE Business Studies - Question 18 - 2022 - Paper 1
Step 1
What is the likely purpose of this financial strategy?
Answer
The strategy of selling a building and leasing it back allows the business to convert a non-liquid asset into cash. This inflow can be used to enhance operational liquidity and potentially invest in growth opportunities. By leasing the property, the business continues to operate without disruption, while improving its working capital position. Thus, the likely purpose of this financial strategy is to improve working capital.