Cumulative preferred stock definition
/What is Cumulative Preferred Stock?
Cumulative preferred stock is an equity instrument that pays a fixed dividend on a predetermined schedule, and prior to any distributions to the holders of a company's common stock. The amount of the dividend is usually based on the par value of the stock. Thus, a 5% dividend on preferred shares that have a $100 par value equates to a $5 dividend.
This dividend payment is cumulative, so any delayed prior payments must also be paid before dividend distributions can be made to the holders of a company's common stock. This situation typically arises when a company has cash flow difficulties, and so its board of directors elects to temporarily suspend dividend payments until such time as cash flows improve.
Disclosure of Cumulative Preferred Stock
The terms associated with cumulative preferred stock may be included in the disclosures that accompany the issuing entity’s financial statements. As long as the company has not paid scheduled dividends, the amount of the unpaid dividends is said to be in arrears, and is disclosed in the notes accompanying its financial statements.
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Rights of Cumulative Preferred Shareholders
In the event of liquidation, the holders of preferred stock must be paid off before common stockholders, but after secured debt holders have been paid. Preferred stockholders can have a broad range of voting rights, ranging from none to having control over the eventual disposition of the entity. The exact rights granted will depend on the class of stock issued, and will depend on how desperate the issuer is to obtain funds from investors.
Terms Similar to Cumulative Preferred Stock
Preferred stock is also known as preference shares or cumulative preferred shares. The European term for cumulative preferred stock is cumulative preference shares.
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Non-Cumulative Preferred Stock