What does recapitalization typically involve?

Recapitalization typically involves replacing equity with more debt, which aligns with the strategic goal of restructuring a company's capital structure. This process allows a company to improve its financial leverage by taking on additional debt to buy back shares or pay dividends to shareholders. By increasing the portion of debt in the capital structure, companies can potentially lower their overall cost of capital, increase returns on equity, and achieve greater financial flexibility.

In a recapitalization scenario, management might decide that the current equity position is not optimal for the company's growth or investor returns. By substituting equity with debt, the company may also benefit from tax shields, as interest payments on debt are often tax-deductible, further enhancing shareholder value.

The other options presented, while relevant to various financial strategies, do not accurately define the process of recapitalization. Issuing new shares generally increases equity rather than replacing it; consolidating debts pertains to managing existing obligations without fundamentally altering the capital structure; and selling off divisions for cash is a divestiture strategy aimed at raising capital rather than a restructuring of the existing financing mix.