List 2 possible consequences associated with UNPAID preferred Dividends. Cite 3 chararcteristics of Preferred Stock which...

List 2 possible consequences associated with UNPAID preferred Dividends.

Cite 3 chararcteristics of Preferred Stock which are comparable to a long term debt instrument.

Expert Solution

Two consequences of unpaid preferred dividend are

1. A business may elect to forgo payment of dividends. Because preferred stockholders have priority over common stockholders in regards to dividends, these forgone dividends accumulate and must eventually be paid to preferred shareholders. Therefore, preferred stock dividends in arrears are legal obligations to be paid to preferred shareholders before any common stock shareholder receives any dividend

2. All previously omitted dividends must be paid before any current year dividends may be paid. Preferred dividends accumulate and must be reported in a company’s financial statement. Noncumulative preferred stock do not have this feature, and all preferred dividends in arrears may be disregarded

3 characteristics of preferred stock comparable to long term debts are

1. Both securities have the claim on assets of the firm in case of bankruptcy

2. Both are considered fixed income securities

3. Dividends on preferred stock and interest on debts usually remains constant over time.

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