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

An investor holds participating preference shares with a fixed 5% dividend on a $100 par value. The terms state that if common dividends exceed a specified level, preference holders share in the excess. In a year of exceptionally strong earnings and large common dividends, the preference shareholder is most likely to receive:

The holder most likely receives the $5 fixed dividend plus an extra amount under the participation feature, because earnings and common dividends exceeded the specified threshold. Non-participating shares would receive only the fixed dividend, and preference dividends rank ahead of common dividends.

  1. Aonly the fixed $5 per share, as with non-participating shares
  2. Bthe $5 fixed dividend plus an additional amount based on the participation featureCorrect
  3. Ca dividend lower than $5 because common shareholders are paid first

Explanation

Participating preference shares pay the stated dividend and then an extra amount when common dividends or earnings exceed a threshold. Non-participating shares would only receive $5. Preference dividends rank ahead of common dividends, so the third option is wrong.

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