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HKSI PrepStudyingPaper 1
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Harbour Dragon Ltd has 6% cumulative preference shares in issue. It paid no preference dividend for 2024 or 2025 and now wants to pay an ordinary dividend for 2026. What must it pay first?
A cumulative preference share carries any unpaid fixed dividend forward. All arrears, together with the current year's fixed dividend, must be paid before any ordinary dividend is paid. Harbour Dragon must therefore pay the 6% dividends for 2024, 2025 and 2026 before declaring an ordinary dividend for 2026. Treating the earlier dividends as lapsed is the rule for non-cumulative shares. The current year's preference dividend also ranks ahead of the ordinary dividend, so it cannot be deferred behind it, and preference dividends never rank after ordinary dividends. Source: Standard corporate finance (cumulative preference shares) (as at October 2026).
Applying the non-cumulative rule. Cumulative means arrears pile up and must all be cleared, with the current year's dividend, before ordinary holders get anything.
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