Which of the following is true about cumulative preference shares?
Answer Details
Cumulative preference shares have the feature that unpaid dividends are carried forward to the next period. This means that if the company is not able to pay dividends to the shareholders in a particular year, the unpaid dividends are accumulated and carried forward to the next year. This ensures that the shareholders receive their dividends eventually, even if the company faces a temporary setback. In contrast, non-cumulative preference shares do not have this feature, and if the company is unable to pay dividends in a particular year, the shareholders simply miss out on the dividends for that year. Therefore, cumulative preference shares are considered to be less risky than non-cumulative preference shares, and they generally offer a lower rate of return to the shareholders.