Question 3

Suppose that instead of plowing back money bank into lucrative ventures, Tencent China's management is going to invest in the capital market where expected return on equity (ROE) is 5%, which is below the return of 6.8% that investors could expect to get from comparable securities. It is expected to pay a dividend next year of RM0.63. Assume the zero growth value of Tencent China is

RM13.51.

Required:

(a)Find the sustainable growth rates for the dividends and earnings in these circumstances. Assume a 68.6% payout ratio.(5 marks)

(b) Find the new value of the investment opportunities. Explain why this value is negative despite the positive growth rate in earnings and dividends.(5 marks)