A firm has the choice to pay a dividend or to reinv est its

A firm has the choice to pay a dividend or to reinv

est its profits. The firm decides to

survey its shareholders and the following results a

re obtained concerning the number

of shares owned and the shareholder’s preference

Preference

# of Shares Owned     Pay Dividend     Reinvest Indifferent

0-99                           35                        17 8

100-250                      31                        23                   6

250 or more                34                        30                  16

Test the hypothesis at the 1% level of significance

whether the shareholder’s preference

is independent of the number of shares owned.

Solution

alpha = 0.01

df = 3-1 = 2

critical value = 6.965

as you can see the value of indifferent for 0-99 is 8 and 250 or more is 16

they are greater than the critical value so they are not independent of the number of shares owned