Understanding Cumulative Preferred Shares

Hard Equity Markets And Instruments Preferred Shares

In the context of equity markets, preferred shares can provide specific benefits and drawbacks for investors. A company issues both common and preferred shares to finance its operations. Investors need to understand the intricacies of these financial instruments to make informed investment decisions. Consider the following scenarios concerning a company that has issued cumulative preferred shares:

1. If the company suspends dividend payments, all unpaid dividends must be paid in full before common shareholders receive any dividends.

2. If the company's financial health deteriorates, preferred shareholders may still receive their dividends as long as the company does not go bankrupt.

Which of the following statements about the characteristics of cumulative preferred shares is true?

Cumulative preferred shareholders lose their right to unpaid dividends if the company resumes dividend payments.

Cumulative preferred shareholders are entitled to receive all missed dividends before any dividends are paid to common shareholders.

Cumulative preferred shares generally allow shareholders to convert their shares to common shares at their discretion.

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