Suppose you own 100 shares of General Motors stock, and the company earned $6 per share during the last reporting period. Suppose also that GM could either pay all of its earnings out as dividends (in which case you would receive $600) or retain the earnings in the business, buy more assets, and cause the price of the stock to increase by $6 per share (in which case the value of your stock would rise by $600).
a. How would the tax laws influence what you, as a typical stockholder, would want the company to do?
b. Would your choice be influenced by how much other income you had? Why might the desires of a 35-year-old doctor differ with respect to corporate dividend policy from the desires of a retiree living on a small income?
c. How might the corporation’s decision with regard to the dividends it pays influence the price of its stock?