Question

Dagwood Inc. recently noted that its 4% preferred stock and 4% participating preferred stock, which are both cumulative, have priority as to dividends up to 4% of their par value. Its participating preferred stock participates equally with the common stock in any dividends in excess of 4%. What is meant by the term participating? Cumulative?

Short answer

Dagwood Inc. consists of the fully participating preferred stockin the given situation.

Step-by-step solution

Meaning of Participating

Security holders who do not participate in the income distribution have the right only to receive the stipulated fixed income.

In the case of a partly participating security, it means that the security may also benefit from dividends that the ordinary stock receives up to a specific amount or rate in addition to the fixed dividend payout.

Meaning of cumulative

Dividends that are not paid in a given year must be restored in the following year before earnings can be distributed to individual investors.

Anarrears dividend represents any dividends that have not been paid on cumulative preferred shares. Dividend arrears are not a burden unless the board of directors declares them.