Cumulative Preferred

Cumulative preferred stock means:

1. A.It converts to common automaticallyConversion into equity is the convertible feature, a separate provision that an issue may or may not carry. Cumulative concerns what happens to skipped dividends, not what the share can turn into.
2. B.Dividends can never be missedThis overstates the protection. A cumulative preferred dividend can certainly be skipped when the board declines to declare it. What cumulative guarantees is that the skipped amount is recorded as arrears and must be cleared before common receives anything.
3. C.It has voting rights alwaysVoting is generally what a preferred holder gives up in exchange for dividend priority. Some issues grant limited voting rights in narrow circumstances, but that is a separate feature, and cumulative describes dividend treatment rather than governance.
4. D.Missed dividends accumulate and are paid before common dividendsCorrect - arrears must be cleared first.

Why: Unpaid (in-arrears) dividends on cumulative preferred accumulate and must be paid before any common dividend.

A company suspends its preferred dividend for two years, then resumes paying. Holders of CUMULATIVE preferred stock:

1. A.Receive the skipped dividends plus a share of the company's profits above a stated levelSharing in excess profits is the participating feature, which is separate from the cumulative feature.
2. B.May convert their shares into common stock to recover the skipped dividendsConversion is a separate feature found on convertible preferred, and it is not a remedy for arrears.
3. C.Must receive the two years of skipped dividends before any common dividend is paidCorrect. Arrears accumulate and must be cleared ahead of any common distribution.
4. D.Receive only the current year's dividend; the skipped years are permanently lostThat describes straight, or noncumulative, preferred. Missed dividends there are gone for good.

Why: Cumulative preferred accumulates any skipped dividends as arrears. Before the company may pay anything to common shareholders, it must first pay all accumulated arrears plus the current preferred dividend. That is the entire protection cumulative preferred offers, and it is why it usually carries a lower yield than straight preferred.

A company skipped its 6 dollar cumulative preferred dividend for two years. This year it wants to pay a common dividend. Per preferred share, it must first pay...

1. A.Nothing; skipped cumulative dividends are forgivenForgiveness applies to noncumulative preferred, not cumulative.
2. B.6 dollars, only the current yearThe two skipped years accumulated and must also be paid.
3. C.18 dollars — two skipped years plus the current 6 dollarsCorrect — cumulative arrears (12 dollars) plus the current 6 dollars equal 18 dollars.
4. D.12 dollars, only the arrears, waiving the current yearThe current dividend is not waived; it is owed on top of the arrears.

Why: Cumulative arrears accumulate: two skipped years (12 dollars) plus the current 6 dollars equal 18 dollars per share, all payable before any common dividend.

Which statement best distinguishes cumulative preferred from participating preferred?

1. A.Cumulative preferred requires skipped dividends to be made up before common is paid, while participating preferred may receive more than its stated rate in a strong yearCorrect. Cumulative looks backward at missed payments; participating looks forward at excess profits.
2. B.Cumulative preferred is callable while participating preferred is notCallability is an independent feature. Either type may or may not be callable.
3. C.Cumulative preferred carries voting rights while participating preferred does notNeither feature concerns voting. Both types are typically nonvoting.
4. D.Cumulative preferred may receive more than its stated dividend, while participating preferred accumulates arrearsSwaps the two definitions, which is the single most common confusion on this pair.

Why: Cumulative addresses the past: skipped dividends accumulate as arrears and must be cleared before common is paid. Participating addresses the upside: the holder may receive more than the stated rate in a strong year.