Definition
A passed dividend refers to a dividend that is normally paid on common shares but is not declared by the company’s board of directors, often due to financial difficulties. This term is synonymous with an omitted dividend. In the context of cumulative preferred stock, it refers to dividends that are skipped; these skipped payments accumulate and must be paid out before any dividends can be given to common shareholders.
Examples
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Common Shares:
- Company A typically pays a quarterly dividend to its common shareholders. However, due to a recent downturn in business performance, the board decides not to declare a dividend for this quarter, resulting in a passed or omitted dividend.
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Cumulative Preferred Shares:
- Company B issues cumulative preferred stock that guarantees an annual dividend of $5 per share. Due to financial woes, the company decides not to pay this dividend this year. The unpaid $5 per share is not forgotten but rather accrues and must be paid before any future dividends are issued to common shareholders.
Frequently Asked Questions
What happens to passed dividends on common shares?
If a dividend on common shares is passed, affected shareholders miss out on that dividend payment, and the company does not owe this missed dividend in future periods.
Are passed dividends on cumulative preferred stock lost?
No, passed dividends on cumulative preferred stock are not lost. They accumulate and must be paid out before any dividends can be distributed to common shareholders in the future.
Why might a company fail to declare a dividend?
There are several reasons a company might fail to declare a dividend, including financial difficulties, the need to conserve cash for other operational needs, or the need to reinvest funds back into the business.
Can passed dividends affect a company’s stock price?
Yes, failing to declare expected dividends can negatively impact a company’s stock price as shareholders may perceive this as a sign of financial instability or declining profitability.
Is there a legal obligation to pay accumulated dividends on cumulative preferred stock?
Yes, there is a legal obligation to pay any accumulated dividends on cumulative preferred stock before any dividends can be paid to common shareholders.
Omitted Dividend
A dividend that a company typically declares and pays but fails to do so, usually due to financial constraints.
Cumulative Preferred Stock
A type of preferred stock that entitles shareholders to dividends which, if not paid, accumulate and must be paid out before common shareholders receive any dividends.
Common Shares
Shares that represent ownership in a company, typically entitling shareholders to vote at shareholders’ meetings and to receive dividends.
Financial Distress
A situation when a company is struggling to meet its financial obligations, often leading to measures such as cutting dividends to conserve cash.
Online References
Suggested Books for Further Studies
- “The Intelligent Investor” by Benjamin Graham
- “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports” by Howard Schilit
- “Common Stocks and Uncommon Profits and Other Writings” by Philip Fisher
Fundamentals of Passed Dividend: Corporate Finance Basics Quiz
### What is a passed dividend?
- [x] A dividend that the board of directors fails to declare.
- [ ] A dividend that the board of directors declares early.
- [ ] A dividend that is always paid before any other obligations.
- [ ] A dividend that accumulates in the next fiscal year.
> **Explanation:** A passed dividend refers to a normally expected dividend that the board of directors fails to declare, usually due to financial difficulties.
### What other term is synonymous with passed dividend?
- [ ] Accrued Dividend
- [x] Omitted Dividend
- [ ] Declared Dividend
- [ ] Preferred Dividend
> **Explanation:** Passed dividend is also known as an omitted dividend, where the dividend is expected but not declared or paid.
### What type of stock is affected by passing dividends that accrue until paid?
- [ ] Common Shares
- [x] Cumulative Preferred Stock
- [ ] Convertible Bonds
- [ ] Treasury Stock
> **Explanation:** Cumulative preferred stock is affected by passed dividends that accrue until they are paid, ensuring that missed payments are eventually made up before common shareholders receive dividends.
### What usually causes a company to pass a dividend?
- [ ] Excessive profits
- [ ] Increased shareholder demand
- [x] Financial difficulties
- [ ] Legal issues
> **Explanation:** Financial difficulties are the common reason a company might pass a dividend, as they might need to conserve cash for operations or other critical needs.
### Does a passed dividend on common shares accumulate to future payments?
- [ ] Yes, it always accumulates.
- [ ] Yes, but only under certain conditions.
- [ ] It depends on the company's dividend policy.
- [x] No, it does not accumulate.
> **Explanation:** A passed dividend on common shares does not accumulate for future payments; shareholders miss out on that dividend permanently.
### What happens to the stock price when a dividend is passed?
- [ ] It will definitely increase.
- [ ] It will always remain the same.
- [x] It may decrease due to negative market perception.
- [ ] The stock price is unaffected by dividends.
> **Explanation:** The stock price may decrease due to negative market perception when a dividend is passed, as it may be viewed as a sign of financial trouble.
### How does passing a dividend affect cumulative preferred stock holders?
- [x] Their unpaid dividends accumulate and must be paid before common shareholders.
- [ ] Their dividends are forfeited permanently.
- [ ] They gain voting rights in the company.
- [ ] They receive increased future dividends automatically.
> **Explanation:** Passing a dividend for cumulative preferred stock holders means their unpaid dividends accumulate and must be paid before any dividends are distributed to common shareholders.
### Can a company declare a dividend again after passing one?
- [x] Yes, if their financial condition improves.
- [ ] No, not for one year.
- [ ] Only with shareholder approval.
- [ ] Dividends can only be declared annually.
> **Explanation:** A company can declare a dividend again after passing one if their financial condition improves, restoring their ability to distribute profits.
### Which type of shareholders are directly affected by passed dividends?
- [x] Common shareholders
- [ ] Bondholders
- [ ] Employee stockholders
- [ ] Government agencies
> **Explanation:** Common shareholders are directly affected by passed dividends as their expected income from dividends is not declared or distributed.
### How do accumulated dividends affect cumulative preferred stocks in liquidation?
- [ ] They are ignored in the process.
- [x] They must be paid in full before distributing any assets to common shareholders.
- [ ] They automatically convert to common stocks.
- [ ] They are settled at a discounted rate.
> **Explanation:** In liquidation, accumulated dividends of cumulative preferred stocks must be paid in full before any assets are distributed to common shareholders.
Thank you for exploring the concept of passed dividends in corporate finance and for engaging with our quiz to bolster your understanding of this crucial topic!
