Corporate Restructuring

Correct Answer: Increase in the company's debt-to-equity ratio, potentially leading to tax benefits and improved return on equity

The most likely benefit of a leveraged recapitalization for XYZ Corporation is an increase in the company's debt-to-equity ratio, potentially leading to tax benefits and improved return on equity. A leveraged recapitalization involves a company taking on additional debt to finance a large dividend payout or share repurchase. This increases the company's debt-to-equity ratio, which can lead to tax benefits due to the tax-deductible nature of interest expenses. Additionally, by reducing the equity base, the return on equity can improve. The other options are less likely to be the primary benefits of a leveraged recapitalization. Reducing overall debt levels and improving credit ratings are not typically the goals of this strategy. While operational efficiency may be a secondary benefit, it is not the main focus of a leveraged recapitalization.

Correct Answer: Reducing the company's debt burden and improving its capital structure

The primary objective of a debt-for-equity swap in corporate restructuring is to reduce the company's debt burden and improve its capital structure. By converting a portion of the company's debt into equity, the company can decrease its total debt obligations and interest expenses, while also increasing its equity base. This can help to improve the company's financial health and creditworthiness. Increasing the debt-to-equity ratio is not a primary objective, as this would worsen the company's financial leverage and risk profile. Diluting existing shareholders' ownership is also not a primary goal, but rather a potential consequence of the debt-for-equity swap, as new shares are issued to the participating debtholders.

Correct Answer: Increased financial risk due to higher debt levels

The correct answer is 'Increased financial risk due to higher debt levels'. A leveraged recapitalization involves a company taking on significant additional debt, often to fund share repurchases or pay dividends to shareholders. This action substantially increases the company's financial leverage and, consequently, its financial risk. The other answers are incorrect: 'Reduced ownership concentration as debt holders gain more control' is not accurate. While leverage does increase, debt holders do not gain control or ownership of the company. 'Improved cash flow flexibility through reduced interest expenses' is the opposite of what typically happens. With increased debt, interest expenses will be higher, reducing cash flow flexibility.