What is a key difference between non-cumulative preferred shares and cumulative preferred shares?

Question: What is a key difference between non-cumulative preferred shares and cumulative preferred shares?

Answer options:

• Non-cumulative preferred shares typically have voting rights, while cumulative preferred shares do not. ✅ Unpaid dividends on cumulative preferred shares accumulate and must be paid before common shareholders receive dividends, unlike non-cumulative shares.
• Cumulative preferred shares offer a higher fixed dividend rate than non-cumulative preferred shares.
• Non-cumulative preferred shares have a higher priority in liquidation than cumulative preferred shares.

Correct answer: Unpaid dividends on cumulative preferred shares accumulate and must be paid before common shareholders receive dividends, unlike non-cumulative shares.

Explanation: Cumulative preferred shares require that any missed dividends be paid before common shareholders receive any dividends, which is not the case for non-cumulative preferred shares.