Ridge Corp., a calendar year C corporation, made a nonliquidating cash distribution to its shareholders of $1,000,000 with respect to its stock. At that time, Ridge's current and accumulated earnings and profits totaled $750,000 and its total paid-in capital for tax purposes was $10,000,000. Ridge had no corporate shareholders. Ridge's cash distribution:
I. Was taxable as $750,000 in dividend income to its shareholders.
II. Reduced its shareholders' adjusted bases in Ridge stock by $250,000.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

The dividend policy determines the decision regarding profits, between the payments that are made by the shareholders and the profits that will be reinvested in the company. Retained earnings are a more significant source of funds to finance corporate growth, but dividends represent the cash flows that accrue to shareholders.

The cost of capital and the dividend policy, encompass a great content and a number of very extensive theories, the purpose of this work is not to frustrate readers with the explanation and development of these, but rather aims to understand the notions fundamentals of capital structure and dividend policy, limiting their passive content to achieve understanding.