A preferred stock that is entitled to dividends in arrears is known as:

• A. Convertible
• B. Extendable
• C. Cumulative
• D. Participating

Answer: (C)

Dividends in arrears indicate a cumulative feature of preferred stock—the unpaid dividends accumulate and must be paid before any dividends to common stock. When a preferred stock is cumulative, any missed payments are carried forward as arrears and have to be settled later, ensuring shareholders receive the total promised return before common shareholders get any distribution. The other terms describe different rights: convertible means the stock can be exchanged for common stock; extendable refers to extending the redemption or maturity date; and participating means the holder can receive additional dividends beyond the fixed rate under certain conditions. Therefore, the stock described as having dividends in arrears is the cumulative type.