A Canadian investor holds preferred shares of a publicly traded company. These preferred shares are cumulative. What does the 'cumulative' feature imply?

Question: A Canadian investor holds preferred shares of a publicly traded company. These preferred shares are cumulative. What does the 'cumulative' feature imply?

Answer options:

• The preferred shares can be converted into common shares at the investor's request. ✅ Unpaid dividends accumulate and must be paid before common shareholders receive any dividends.
• The dividend rate on these preferred shares will increase over time.
• The preferred shares have voting rights that accumulate with the number of shares held.

Correct answer: Unpaid dividends accumulate and must be paid before common shareholders receive any dividends.

Explanation: Cumulative preferred shares ensure that if a company misses dividend payments, those unpaid dividends accumulate and must be paid in full to preferred shareholders before any dividends can be paid to common shareholders.