A leading retailer finds itself in a financial bind. It doesn’t have sufficient cash flow from operations to finance its growth, and it is close to violating the maximum debt-to-assets ratio allowed by its covenants. The Vice-President for Marketing suggests, “We can raise cash for our growth by selling the existing stores and leasing them back. This source of financing is cheap, since it avoids violating either the debt-to-assets or interest coverage ratios in our covenants.” Do you agree with his analysis? Why or why not? As the firm’s banker, how would you view this arrangement?
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