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Question
Distinguish between cumulative and non-cumulative preference shares.
Solution
- Cumulative Preference Shares: When dividends go on accumulating if they are not paid, preference shares are said to be cumulative. If, for some reason, dividends in a particular year are not paid, they will be carried forward to the next year. Such unpaid dividends go on accumulating and become payable out of profits in subsequent years. Any dividend can be paid to equity shareholders only after the payment of such accumulated dividends on preference shares. Preference shares are always cumulative unless otherwise stated.
- Non-cumulative Preference Shares: On this type of preference shares, dividends, if unpaid, are not carried forward or do not accumulate. If the company is unable to pay dividends in a particular year, the shareholder's right to dividends in respect of that year is lost forever.
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