[pal_g3]

Dividend payments by a firm change the capital structure by replacing equity with debt. Is it true or false? I'm confused about it and can't understand the logic behind it.. Help needed!

[ArcSine]

Changing capital structure... yes. Replacing equity with debt... maybe.

A dividend payment represents a reduction of equity, while having no effect on debt. Thus the relative proportion of equity to debt (e.g. the Debt / Equity ratio) changes, and that constitutes a change in capital structure.

"Replacing equity with debt" is another matter. It implies a dividend that's financed with the proceeds of a new debt issue (a so-called 'leveraged recap'). This may indeed be part of a dividend payout, but it isn't necessarily the case. If so, though, you've got a ramp-up in debt along with the equity decrease, and hence it's a more dramatic shift in the capital structure, than what you'd have with a dividend payout financed with internal cash, or an asset sale.

[pal_g3]

Thanks.. it is of great help :D