Question

The cumulative feature of preference shares

a. limits the amount of cumulative dividends to the par value of the preference shares.

b. requires that preference dividends not paid in any year must be made up in a later year before dividends are distributed to ordinary shareholders.

c. means that the shareholder can accumulate preference shares until it is equal to the par value of ordinary shares at which time it can be converted into ordinary shares.

d. enables a preference shareholder to accumulate dividends until they equal the par value of the shares and receive the shares in place of the cash dividends.

e. none of the above.

Answer 1

The correct answer is b. requires that preference dividends not paid in any year must be made up in a later year before dividends are distributed to ordinary shareholders.

Preference shares have dividend provisions which are cumulative or non-cumulative. Most shares have the cumulative provisions, which means that any dividend not paid by the company accumulates. Normally, the company pays these unpaid dividends prior to the payment of dividends on the common stock.