What is the effect on debt/equity ratio if proceeds from a sale leaseback are distributed as dividends?

Distributing proceeds from a sale-leaseback as dividends will negatively impact the debt/equity ratio. A sale-leaseback transaction typically involves selling an asset while simultaneously leasing it back, which can improve cash flow and provide liquidity. However, when the proceeds from that transaction are distributed as dividends, the company is effectively reducing its equity.

The debt/equity ratio is a measure of a company’s financial leverage, calculated by dividing total liabilities (debt) by shareholders' equity. When a company pays dividends, it reduces the amount of retained earnings, which is part of shareholders' equity. Although the sale-leaseback transaction may have initially maintained or even improved the ratio by providing cash (and potentially increasing short-term liquidity), the act of distributing that cash as dividends decreases the equity component of the ratio.

Therefore, as the numerator (debt) remains unchanged while the denominator (equity) decreases, the overall ratio increases, indicating a negatively impacted financial structure in terms of leverage, which is why the answer reflects a negative impact on the debt/equity ratio.