SIE practice questionhardPreferred Stock — Participating Feature
An investor holds participating preferred stock with a $5 stated dividend. After all preferred and common dividends are paid, the company has additional earnings to distribute. Which statement is TRUE?
- AThe preferred shareholder receives only the $5 stated dividend and nothing more
- BThe additional earnings are distributed only to common shareholders
- CThe preferred shareholder may receive additional dividends beyond the stated $5✓ Correct answer
- DThe additional earnings must be retained by the company
Explanation
Why C — The preferred shareholder may receive additional dividends beyond the stated $5
Participating preferred stock allows holders to share in additional distributions beyond the stated dividend, typically after common stockholders receive a specified amount. This is a rare but testable feature. Non-participating preferred (A/D) would be limited to only the stated dividend.
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