Multiple Choice
Of the following dividend options, which of these is generally taxable to shareholders?
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12. Stockholders' Equity
Dividends and Dividend Preferences
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When a corporation pays dividends to its preferred shareholders before common shareholders, this is known as:
A
Dividend reinvestment
B
Cumulative voting
C
Dividend preference
D
Stock split
Verified step by step guidance1
Understand the concept of dividend preference: Dividend preference refers to the priority given to preferred shareholders to receive dividends before any dividends are distributed to common shareholders.
Recognize the characteristics of preferred stock: Preferred shareholders typically have a fixed dividend rate and are prioritized over common shareholders in dividend payments.
Differentiate between the terms provided in the problem: Dividend reinvestment refers to using dividends to purchase additional shares, cumulative voting is a voting system for electing directors, and stock split involves dividing existing shares into multiple shares to increase liquidity.
Identify the correct term based on the description: The term 'dividend preference' aligns with the scenario where preferred shareholders are paid dividends before common shareholders.
Conclude that the correct answer is 'Dividend preference' based on the explanation and characteristics of preferred stock.
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