Answer the following.

1. What do you mean by Dividend Policy?
2. What are different theories for investors preference?
3. Explain the potential effect of those theories on stock prices.

4. In 2000, you paid dividends of Rs.2,500,000 out of net income of Rs.9.8 million. You had constant long-run growth rate of 10%. However, in 2001, earnings are supposed to be Rs.13.4 million and you need investment of Rs.7.4 million. You do not expect to continue the growth of 2001 and will sustain the original growth rate of 10%. The capital structure is 40% debt and 60% equity.

Required: Calculate total dividends for 2001 under following alternatives:

1. 2001 dividend payment will remain at the long-run growth rate in earnings.
2. Dividend payout ratio of 2000 will continue.
3. You follow residual dividend model.

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