Brief Definition
Recapitalisation is a financial strategy used by companies to restructure their capital composition, usually involving a significant change in their debt-to-equity ratio. This process can be initiated to stabilize a company’s balance sheet, reduce financial risk, improve cash flow, or to fend off hostile takeovers.
Further Explanation
Recapitalisation is a financial strategy used by companies to restructure their capital composition, usually involving a significant change in their debt-to-equity ratio. This process can be initiated to stabilize a company’s balance sheet, reduce financial risk, improve cash flow, or to fend off hostile takeovers.
Example:
If Company A has $5 million in debt and $5 million in equity, its debt-to-equity ratio is 1:1. If Company A decides to issue $3 million in new shares and uses that money to pay down its debt, its new capital structure would be $2 million in debt and $8 million in equity, resulting in a debt-to-equity ratio of 1:4. This reduces the company’s financial risk and can make it more attractive to investors.