Question

The reasons for recapitalization (borrowing to repurchase stock) and its effect on financial metrics

Answer 1

RECAPITALIZATION

Recapitalization is a business srategy which the company uses for making their financial structure in a proper manner and this will helps to make financial stability for the company. Company use several measures for recapitalization purpose. Actually recapitalization is the process of restructuring the companies equity and debt for the purpose of capital structuring. This is actually the process of changing different financial matrics. Like Removing debentures and adding bonds and may be adding more shares to the company etc. So by doing this we can change the capital structure of the company. This is called recapitalization.

There are many reasons that a company going for recapitalization. If the company have any financial stress or any financial problems then they may going to take recapitalization strategy. Constant declining in the conmpanies share price will leads to recapitalization.At that moment company will issue debt components for the purpose of purchasing its shares back. So it will make more demand to the share and it will leads to incresing the value of the shares. For this purpose company opt this strategy called recapitalization. If the company facing any bankruptacy problem then also they can restructure their capital structure.Actually it is the process of arranging the capital structure of the company in several cases on the basis of whatever is needed at that particular time. It depends on the current situation of the company and according to that situation only the company takes appropriate capital structuring.

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