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Series 7 practice questionmediumEquity Securities — Preferred Stock — Noncumulative

If a company misses a dividend payment on noncumulative preferred stock, which of the following is TRUE?

  1. AThe missed dividend accumulates and must be paid before common stock dividends
  2. BThe company must issue additional shares to compensate
  3. CPreferred shareholders can sue the company for the missed dividend
  4. DThe missed dividend is lost forever and need not be paid in the future✓ Correct answer
Explanation

Why D — The missed dividend is lost forever and need not be paid in the future

With noncumulative preferred stock, if the board of directors decides not to pay a dividend in any given period, that dividend is permanently lost. There is no obligation to make up skipped dividends in the future. This makes noncumulative preferred stock riskier for investors compared to cumulative preferred, which accumulates unpaid dividends as arrearages.

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