In a dividend recap, which balance sheet change occurs?

In a dividend recap, which balance sheet change occurs?

• A. Debt decreases and Shareholders' Equity increases
• B. Assets decrease and Liabilities increase
• C. Both sides of the balance sheet remain balanced with no change
• D. Debt increases and Shareholders' Equity decreases

Answer: (D)

A dividend recap works by funding a large dividend with new debt. The company issues debt, which increases liabilities (debt). That cash is then paid out to shareholders as the dividend, which reduces cash, so assets stay roughly flat. The payout reduces shareholders’ equity because it lowers retained earnings (the earnings portion of equity that gets distributed). So the net effect is higher debt and lower equity, with assets about unchanged.

A dividend recap works by funding a large dividend with new debt. The company issues debt, which increases liabilities (debt). That cash is then paid out to shareholders as the dividend, which reduces cash, so assets stay roughly flat. The payout reduces shareholders’ equity because it lowers retained earnings (the earnings portion of equity that gets distributed). So the net effect is higher debt and lower equity, with assets about unchanged.