Implications of Dividend Cuts on Cumulative Preferred Shares

Very Hard Equity Markets And Instruments Preferred Shares

An investment firm is analyzing the capital structure of a company that has a mix of common shares, preferred shares, and long-term debt. The preferred shares are classified as cumulative, non-convertible, and have a par value of $100 with a stated dividend rate of 6%. The firm is considering the implications of a potential dividend cut on the preferred shares and how that might affect their valuation and investor sentiment.

In the case of a dividend cut, which of the following statements about the preferred shares is most accurate?

The preferred shares will have a priority claim over common shares, but investors will not receive any dividends until a specified date.

The cumulative nature ensures that all missed dividends must be paid before any dividends can be distributed to common shareholders.

The non-convertible nature implies that the value of preferred shares will increase relative to common shares if the dividend is cut.

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