Question : What does the term "cumulative" mean in relation to preference shares?
Option 1: The right to vote in company meetings
Option 2: The obligation of the company to pay accumulated dividends
Option 3: The option for shareholders to convert preference shares into equity shares
Option 4: The requirement to pay a fixed dividend on preference shares
Correct Answer:
The obligation of the company to pay accumulated dividends
Solution : The correct answer is (b) The obligation of the company to pay accumulated dividends.
When preference shares are described as "cumulative," it means that the company has an obligation to pay accumulated or unpaid dividends on the preference shares in the future before paying dividends to equity shareholders. Cumulative preference shares have a feature that ensures any unpaid dividends from previous periods accumulate and must be paid to shareholders before dividends can be distributed to other shareholders. When preference shares are described as "cumulative," it means that the company has an obligation to pay accumulated or unpaid dividends on the preference shares in the future before paying dividends to equity shareholders.
