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CFA Level I · CFA Level I Exam · Equity Instrument Features

An investor holds cumulative preference shares of a company that skipped its preference dividend last year. This year the company wishes to pay a dividend to common shareholders. Which statement is most accurate?

With cumulative preference shares, the missed dividend accumulates as an obligation. The company must pay the arrears plus the current preference dividend before it can pay any dividend to common shareholders. Forfeiture of missed dividends applies only to non-cumulative preference shares.

  1. AThe skipped dividend is forfeited, so only the current-year preference dividend is owed first
  2. BThe company must pay the skipped and current preference dividends before any common dividendCorrect
  3. CThe company may pay common dividends first because preference shareholders have no claim on skipped dividends

Explanation

Cumulative preference shares accumulate unpaid dividends, which must be paid in full, together with the current dividend, before common shareholders receive anything. Forfeiture of the skipped dividend describes non-cumulative shares.

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