Asked by Rachel Romero on Jun 25, 2024
Verified
Which of the following is a correct statement about cumulative and noncumulative preferred stock?
A) They both receive dividends in arrears.
B) Cumulative stock's undeclared dividends accumulate each year until paid while noncumulative stock's right to receive dividends is forfeited in any year that dividends are not declared.
C) Cumulative preferred stock is guaranteed to receive its dividends.
D) Cumulative preferred stock's right to receive dividends is forfeited in any year that dividends are not declared while noncumulative stock's undeclared dividends accumulate each year until paid.
Cumulative
Referring to the total amount aggregated over a period of time.
Noncumulative
Noncumulative refers to a type of preferred stock where dividends do not accumulate if they are not declared or paid in a given dividend period.
Dividends in Arrears
Dividends on cumulative preferred stock that have not been paid in the period they are due.
- Detail the discrepancy between cumulative and noncumulative preferred stocks.
Verified Answer
KB
Kaur Banwait SainiJun 29, 2024
Final Answer :
B
Explanation :
Cumulative preferred stock's undeclared dividends accumulate each year until paid while noncumulative stock's right to receive dividends is forfeited in any year that dividends are not declared. This means that cumulative preferred stockholders have a higher chance of receiving their dividends even if the company is not doing well, while noncumulative stockholders may not receive dividends in low-profit years.
Learning Objectives
- Detail the discrepancy between cumulative and noncumulative preferred stocks.