Question

Stock for which any missed dividend payments must be paid in the future to the preferred shareholders before the common shareholders can receive any dividends is known as ________ stock?

1) cumulative preferred
2) noncumulative preferred
3) common
4) participating preferred

Answer 1

Cumulative preferred stock is the type of stock in which any missed dividend payments must be paid in the future to the preferred shareholders before the common shareholders can receive any dividends.

Step-by-step explanation:

Cumulative preferred stock is the type of stock in which any missed dividend payments must be paid in the future to the preferred shareholders before the common shareholders can receive any dividends. This means that if a company fails to pay a dividend in a particular year, the unpaid amount accumulates and must be paid in the future.

For example, let's say a company has cumulative preferred stock with a dividend rate of $2 per share. If the company fails to pay this dividend in Year 1, the unpaid amount of $2 per share will carry over to Year 2 and will need to be paid to the preferred shareholders before any dividends are paid to common shareholders.

Cumulative preferred stock provides additional protection to preferred shareholders and ensures that they receive their dividends even if the company experiences temporary financial difficulties.