Final answer:
A firm's stock price is likely to increase (option a) if its payout policy is designed to reduce the tax burden on investors. This is because a more tax-efficient payout, usually favoring capital gains over dividends, would make the investment more attractive and increase the demand for the stock.
Step-by-step explanation:
If a firm chooses a payout policy that results in investors paying less taxes on their returns, this generally means that the payout is more tax-efficient for the investors. When investors receive dividends, they typically have to pay taxes on those dividends at the ordinary income tax rate. However, if an investor receives a return in the form of a capital gain, they may be taxed at a lower capital gains tax rate, which can depend on how long they held the investment before selling.
A lower tax burden on the returns can make the investment more attractive to investors, and as a result, increase demand for the firm's stock. When demand for a stock increases, its price usually goes up as well. Thus, if the firm's payout policy results in less taxes paid by investors, it is likely that the firm's stock price should increase.