Which of the following statements about the income statement after a dividend recap is true?

Which of the following statements about the income statement after a dividend recap is true?

• A. It shows a large increase in operating income
• B. It shows a large decrease in net income
• C. It is unchanged
• D. It shows higher interest expense

Answer: (D)

A dividend recapitalization funds a special payout by taking on new debt, so the income statement changes mainly through financing costs rather than operating performance. The key effect is an increase in interest expense, since the company now pays interest on the new debt. Operating income remains the same because its measure reflects core operations, not how the company chooses to finance a dividend. With higher interest expense, pretax income and net income would fall, but the direct, observable change on the income statement is the higher interest expense.

A dividend recapitalization funds a special payout by taking on new debt, so the income statement changes mainly through financing costs rather than operating performance. The key effect is an increase in interest expense, since the company now pays interest on the new debt. Operating income remains the same because its measure reflects core operations, not how the company chooses to finance a dividend. With higher interest expense, pretax income and net income would fall, but the direct, observable change on the income statement is the higher interest expense.