medium · Investment Banking
A sponsor executes a 'Dividend Recapitalization' by raising $300 million of new debt.
What is the immediate effect on the sponsor's IRR?
- IRR only increases if the dividend proceeds are used to pay down the company's existing senior debt tranche.
- IRR remains the same because the total enterprise value of the underlying company is left unchanged by the recap.
- IRR increases because the sponsor receives an early cash inflow, accelerating the return on their capital.
- IRR decreases because the company now carries higher interest expense and correspondingly higher financial risk.
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