# Dividend Hypothesis/Theory

Phil Grange, the CEO of Haveloche Corporation, has been asked to be a guest lecturer at Cokesbury College. One of the finance professors has specifically requested a discussion on Haveloche's dividend policy. In preparation, Phil has reviewed several textbooks that Dr. Roche, the professor, has provided, and has printed out the history of dividends for the nine years that Haveloche Corporation has been publicly traded.

The case addresses the presence of data that does not seem to correlate with any particular dividend policy hypothesis (except for irrelevance, perhaps). The student is asked to graphically analyze the price data. Astute readers will understand that dividends are not the only element at work on the firm's stock price. The case highlights the difficulty of determining an optimal policy since other factors cannot be held constant while dividends are manipulated in the current point in time, and that even if that were possible, the variety of opinions and hypotheses surrounding dividend policy does not indicate any concrete conclusion as to what is an ideal policy.

1. Enter the data from tables 1 and 2 into a spreadsheet program. Graph a scatter plot of the dividend with the stock price. Does there appear to be a correlation?

2. Plot the change in price (from t-1 to t+1) with the dividend amount. Does there appear to be a correlation? Plot the change in price with the year to year change in the dividend. Does there appear to be a correlation?

3. Summarize the implications of each dividend hypothesis/theory found in your financial management textbooks. Which one explains what is going on with Haveloche?

4. What would you suggest to Phil concerning what type of dividend policy to pursue? Justify your answer.

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#### Solution Preview

QUESTIONS FROM THE CASE

1. Enter the data from tables 1 and 2 into a spreadsheet program. Graph a scatter plot of the dividend with the stock price. Does there appear to be a correlation?

Students will find that no correlation is obvious from the scatter plot. The resulting graph appears below: Price$0.00$10.00$20.00$30.00$40.00$50.00$60.00$70.00$80.00$90.00$0.00$0.50$1.00$1.50$2.00$2.50$3.00

2. Plot the change in price (from t-1 to t+1) with the dividend amount. Does there appear to be a correlation? Plot the change in price with the year to year change in the dividend. Does there appear to be a correlation?

Students will find that there is little correlation between the dividend level and the price change. The resulting graph appears below: ...