Question 1: 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?

Question 1: 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?