Products & Their RisksQuestion 3 of 398
A cumulative preferred stock missed its dividend for two years. Before common shareholders can receive any dividend, the company must:
a.Pay all missed (in arrears) preferred dividends plus the current preferred dividend
b.Pay only the current year's preferred dividend
c.Convert the preferred shares into common shares
d.Pay a penalty rate of interest to the preferred holders
Explanation
Cumulative preferred accumulates unpaid dividends in arrears, and all arrears plus the current preferred dividend must be paid before common shareholders get anything. Paying only the current year would apply to non-cumulative preferred. There is no automatic conversion or penalty interest requirement.
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