Answer (A) is correct . Dividends on cumulative preferred stock accrue until declared; that is, the book value of the preferred stock increases by the amount of any undeclared dividends. Participating preferred stock participates with common shareholders in excess earnings of the company. In other words, 8% participating preferred stock might pay a dividend each year greater than 8% when the corporation is extremely profitable. Therefore, nonparticipating preferred stock will receive no more than is stated on the face of the stock. Preferred shareholders rarely have voting rights. Voting rights are exchanged for preferences regarding dividends and liquidation of assets.
Answer (B) is incorrect because A corporation does not receive a tax deduction for making dividend payments on any type of stock.
Answer (C) is incorrect because Preferred stock normally need not be redeemed as long as the corporation remains in business.
Answer (D) is incorrect because Preferred shareholders do have priority over common shareholders in a liquidation.
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