What is a dividend recapitalization?

What is a dividend recapitalization?

• A. The company borrows money solely to pay a special dividend to the PE firm.
• B. The company borrows to fund a normal dividend to all shareholders.
• C. The company repays existing debt with cash.
• D. The company issues equity to pay a dividend

Answer: (A)

A dividend recapitalization is when a company borrows new money specifically to pay a large, one‑time dividend to its shareholders—typically the private equity sponsor. It uses debt to extract value from the business rather than using profits or issuing equity, so the company’s balance sheet grows more leveraged while still continuing operations. That’s why the best match is borrowing money to fund a special dividend to the PE firm. The other options describe different actions: repaying existing debt with cash would reduce leverage, not pay a dividend; funding a normal dividend to all shareholders isn’t about a one-time recap via new debt; issuing equity to pay a dividend would dilute ownership rather than leverage debt to payout.

A dividend recapitalization is when a company borrows new money specifically to pay a large, one‑time dividend to its shareholders—typically the private equity sponsor. It uses debt to extract value from the business rather than using profits or issuing equity, so the company’s balance sheet grows more leveraged while still continuing operations.

That’s why the best match is borrowing money to fund a special dividend to the PE firm. The other options describe different actions: repaying existing debt with cash would reduce leverage, not pay a dividend; funding a normal dividend to all shareholders isn’t about a one-time recap via new debt; issuing equity to pay a dividend would dilute ownership rather than leverage debt to payout.