Question $3$

Honey Ltd is a holding company that owns and controls a number of companies. The Board of

Directors is currently reviewing its methods for estimating the cost of capital and the dividend

policy for one of its subsidiaries $-$Lemonade Ltd$.$ Details are provided below.

Lemonade Ltd

For the most recent year end $31$ December $2022,$ the company reported a profit after tax of $$700$

million. Honey expects this level of profit to continue into the foreseeable future with no growth

forecasted. The current dividend payout ratio is $30\%,$ with no growth. The cost of equity for

this company has recently been calculated at $8\%.$

The finance team has proposed two alternative strategies that would impact on the growth rate

in profits, the return required by the holders of equity shares and the dividend payout ratio. The

proposed strategies are summarised below.

Required:

a$)$ Prepare a table that shows the estimated market value of equity for Pan Ltd that would result

from adopting each of the three strategies $($Current; Proposed WX; and Proposed WQ$).$

Your answers should be calculated to the nearest million dollars.

$(12$ marks$)$

b$)$ Briefly analyse your findings in part $($a$).$

c$)$ Critically evaluate the practicality of Modigliani and Miller's dividend irrelevancy theory

in the current market environment.