Canadian Securities Course (CSC) Level 1 Practice Exam

How do cumulative and non-cumulative features of Preferred Shares work?

1. Common dividends must be paid before preferred dividends.

2. Dividends accrue only for cumulative preferred shares.

3. Shareholder entitled to a payment of a dividend only when declared with non-cumulative preferred shares.

4. Preferred dividends are paid last, regardless of the type.

The correct answer is: Shareholder entitled to a payment of a dividend only when declared with non-cumulative preferred shares.

Cumulative and non-cumulative features of preferred shares are essential concepts in understanding how dividends are distributed to shareholders. For non-cumulative preferred shares, shareholders are entitled to receive dividends only when they are declared by the company’s board of directors. This means that if a dividend payment is missed or not declared in a particular period, the shareholder does not have any claim to that missed dividend in the future. In essence, the obligation to pay dividends does not accumulate or carry over; shareholders cannot receive unpaid dividends later. On the other hand, cumulative preferred shares offer a different structure in which missed dividends accumulate. If a company fails to pay dividends in one or more periods, those amounts are owed to cumulative preferred shareholders until they are paid. This distinct feature ensures that cumulative preferred shareholders have a stronger claim to dividends over non-cumulative shareholders, but it specifically applies to cumulative shares. To provide context on the other options, common dividends must indeed be paid before preferred dividends, regardless of whether they are cumulative or non-cumulative. This speaks to the priority of common shareholders in dividend distribution. Additionally, while dividends accrue for cumulative preferred shares, this does not pertain to the non-cumulative variety, which clearly stipulates that missed dividends are not owed. Lastly,