Question

A preferred stock which must make up dividends in arrears is called a:

a. cumulative preferred
b. callable preferred
c. convertible preferred
d. participating preferred

Answer 1

A preferred stock that must pay accumulated unpaid dividends is known as cumulative preferred, which provides an advantage to investors seeking reliable income. The correct option is (a).

Step-by-step explanation:

A preferred stock which must make up dividends in arrears is called a cumulative preferred.

This means that if the company fails to pay dividends in any year, these unpaid dividends ('dividends in arrears') accumulate and must be paid out before any dividends can be paid to common shareholders.

This feature is desirable for investors looking for a reliable source of income, as they will not lose out on dividends if the company has a bad year financially.