What type of preferred shares accumulate unpaid dividends and ensure they are paid before common shareholders receive dividends?

What type of preferred shares accumulate unpaid dividends and ensure they are paid before common shareholders receive dividends?

• A. Participating preferred shares
• B. Convertible preferred shares
• C. Cumulative preferred shares
• D. Callable preferred shares

Answer: (C)

Cumulative preferred shares are designed to accumulate unpaid dividends that are owed to shareholders if the issuing company does not pay dividends in a given period. This feature means that if a company encounters financial difficulties and cannot pay dividends to any shareholders, the dividends owed to holders of cumulative preferred shares will build up or "accumulate." These must be paid out before any dividends can be distributed to common shareholders when the company is able to do so again. This characteristic of cumulative preferred shares ensures that holders have a level of protection, as they are entitled to receive all outstanding unpaid dividends before common shareholders receive any dividends. This makes them a preferred choice for investors who seek stable income through dividends, especially during times when a company may not consistently generate the required earnings to pay dividends regularly. In contrast, participating preferred shares allow shareholders to benefit from additional dividends after a certain threshold is reached, but they do not necessarily accumulate unpaid dividends. Convertible preferred shares can be converted into common shares at the option of the shareholder, but again, they do not track unpaid dividends like cumulative preferred shares. Callable preferred shares can be repurchased or "called" by the issuer at pre-defined prices, but they also do not accumulate unpaid dividends.

Cumulative preferred shares are designed to accumulate unpaid dividends that are owed to shareholders if the issuing company does not pay dividends in a given period. This feature means that if a company encounters financial difficulties and cannot pay dividends to any shareholders, the dividends owed to holders of cumulative preferred shares will build up or "accumulate." These must be paid out before any dividends can be distributed to common shareholders when the company is able to do so again.

This characteristic of cumulative preferred shares ensures that holders have a level of protection, as they are entitled to receive all outstanding unpaid dividends before common shareholders receive any dividends. This makes them a preferred choice for investors who seek stable income through dividends, especially during times when a company may not consistently generate the required earnings to pay dividends regularly.

In contrast, participating preferred shares allow shareholders to benefit from additional dividends after a certain threshold is reached, but they do not necessarily accumulate unpaid dividends. Convertible preferred shares can be converted into common shares at the option of the shareholder, but again, they do not track unpaid dividends like cumulative preferred shares. Callable preferred shares can be repurchased or "called" by the issuer at pre-defined prices, but they also do not accumulate unpaid dividends.