SIE practice questionmediumPreferred Stock — Cumulative Feature
A cumulative preferred stock has a $4 annual dividend. The company skipped dividends for 2 years and now wants to pay common stock dividends. What must happen first?
- AThe company must file a bankruptcy petition
- BThe company must pay $12 to preferred shareholders (2 years of arrears plus current year)✓ Correct answer
- CThe company may pay common dividends first if approved by the board
- DThe company must pay $4 to preferred shareholders
Explanation
Why B — The company must pay $12 to preferred shareholders (2 years of arrears plus current year)
With cumulative preferred stock, all dividends in arrears PLUS the current dividend must be paid before any common stock dividends can be distributed. Two years of missed dividends ($4 x 2 = $8) plus the current year's dividend ($4) = $12 total. Non-cumulative preferred would not accumulate unpaid dividends.
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