Paul Raymond, president of Washington Water Power, was worried about the possibility of a takeover attempt and the fact that the number of common shareholders has been decreasing since 1983. Suppose he instructed you to study the number of common shareholders since 1968 and be prepared to compute a forecast for 1996. You decide to investigate three potential predictor variables: earnings per share (common), dividends per share (common), and payout ratio. You collect the data from 1968 to 1995, as shown in Table P-12.

a. Run these data on the computer, and determine the best model using your chosen predictor variables.
b. Is serial correlation a problem in this model?

c. If serial correlation is a problem, write a memo to Paul that discusses various solutions to the autocorrelation problem and includes your final recommendation.

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