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CFA Level I · CFA Level I Exam · Equity Issuance and Trading

A company issues cumulative preference shares and misses its dividend payment this year. Which statement best describes the effect on the company's obligations?

With cumulative preference shares, a missed dividend accumulates as arrears. The company must pay all arrears to preference holders before it can pay any dividend to common shareholders. Forfeiture applies to non-cumulative shares, and conversion depends on a separate conversion feature.

  1. AThe missed dividend is forfeited, and the company owes nothing further
  2. BThe missed dividend accumulates and must be paid before any common dividendCorrect
  3. CThe preference shares automatically convert into common shares

Explanation

Cumulative preference shares carry forward unpaid dividends as arrears. These must be settled before common shareholders receive any dividend. Forfeiture describes non-cumulative shares, and conversion occurs only if the shares are convertible and the holder or issuer exercises that right.

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