Cumulative Preferred Stock Dividends in Arrears
A corporation has outstanding 6% cumulative preferred stock ($100 par) and common stock. Due to cash constraints, the company omitted dividend payments for the past two years. In the current year, the board declares dividends. How much per share must be paid to cumulative preferred shareholders before ANY dividend can be paid to common stock?
Cumulative preferred stock requires that ALL missed dividends in arrears (2 years × $6.00 = $12.00) PLUS the current year's dividend ($6.00) must be paid in full ($18.00 total) before common shareholders receive a single cent.
Complete Analysis & Legal Rationale
Non-cumulative preferred stock would only require the current year's dividend ($6.00), forfeiting past missed dividends. The 'cumulative' feature protects preferred investors from dividend skipping.
Mathematical Step-by-Step Derivation
- Step 1: Annual Dividend = 6% × $100 Par = $6.00 per year.
- Step 2: Dividends in Arrears = 2 years × $6.00 = $12.00.
- Step 3: Current Year Dividend = $6.00.
- Step 4: Total Due Before Common Dividends = $12.00 + $6.00 = $18.00 per share.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
2 years arrears ($12) + current year ($6) = $18.00 total.
Describes non-cumulative preferred stock, ignoring arrears.
Omits current year dividend.
Common dividends cannot be paid while preferred obligations remain unsatisfied.
Official Standard: Seniority of cumulative preferred dividends over common equity.