Reference no: EM131206351

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The automobile industry was quite prosperous in the 1920s, but was hit hard by the depression. Studebaker Corporation, which was relatively weak to begin with, suffered more than other automotive manufacturers. Part of the reason for its financial problems was the belief by the firm's president that dividends alone could increase the value of the stock. He implemented a dividend policy that increased the dividend payout ratio from 43 percent in the early 1920s to 91 percent in 1929. However, the dividend was held constant in 1930 and 1931, even as sales and earnings decreased. This led to a payout ratio of 500 percent (!) in 1930 and 350 percent in 1931. In 1932, the company lost $8.7 million, but still paid $1 million in dividends! The firm's financial health was damaged significantly by the generous dividend policy, and it filed for reorganization in March, 1933. Tragically, the firm's president took it very personally and shot himself three months later.