Preferred stock has characteristics of both equity and debt.
Preferred shares generally have a dividend requirement that makes them appear similar to debt.
A cumulative preferred requires that if a company fails to pay a dividend (or pays less than the stated rate), it must make up for it at a later time.
Dividends accumulate with each passed dividend period (which may be quarterly, semi-annually or annually).
CPAs should determine the required dividend yield by performing an analysis similar to a market-based approach and comparing the preferred stock’s dividend rate with that of a publicly traded stock.