If a corporation issues cumulative, participating preferred stock, which of the following is true regarding the rights of the preferred stockholders?

Question

Quizplus · Accepted Answer

If a corporation issues cumulative, participating preferred stock, the rights of the preferred stockholders include the following:
b. They will share in the dividends that exceed a specified amount.
This statement is true because "participating" preferred stock means that the holders are entitled to their fixed dividend and also have the right to participate in additional earnings along with common stockholders once a specified dividend level has been paid on the common shares. This participation feature allows preferred stockholders to benefit from the company's profitability beyond their fixed dividend rate.
Additionally, because the preferred stock is "cumulative," if dividends are not declared in any given period, the dividends that should have been paid are accumulated. The company must pay these accumulated dividends to the preferred stockholders before any dividends can be paid to common stockholders in the future. This addresses the other options:
a. They must forego dividends for any periods when no dividends are declared. This is incorrect because cumulative preferred stockholders do not forego dividends; rather, they accumulate the right to receive past unpaid dividends before common stockholders can receive any dividends.
c. They will receive a fixed dividend regardless of the amount of dividends declared. This is partially true; preferred stockholders do receive a fixed dividend, but the "participating" feature means they can also receive more than the fixed amount if the company's dividends exceed a certain level.
d. They will have an option to convert their shares to common stock at a specified date. This is incorrect in the context of the question. The ability to convert preferred shares into common shares is a feature of "convertible" preferred stock, not necessarily cumulative, participating preferred stock.

If a Corporation Issues Cumulative, Participating Preferred Stock, Which of the Following