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CMA Intermediate · Financial Management and Business Data Analytics · Sources of Finance

Which feature distinguishes cumulative preference shares from non-cumulative preference shares?

Cumulative preference shares allow dividends not paid in a year to accumulate as arrears. These arrears must be paid before equity shareholders receive any dividend. Non-cumulative preference shares lose the unpaid dividend of that year, which is the key difference between the two types.

  1. AUnpaid preference dividends of earlier years accumulate and must be paid before any equity dividendCorrect
  2. BHolders get voting rights on every resolution at all times
  3. CThe shares are converted into equity automatically after five years
  4. DThe shares must be redeemed within one year of issue

Explanation

Cumulative preference shares carry forward arrears of dividend that were not paid because of insufficient profits. These arrears must be cleared before equity shareholders get any dividend. Non-cumulative shares lose the unpaid dividend of a year. Voting on every resolution and automatic conversion are not features of this type.

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