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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)

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Question 3 Suppose that instead of plowing back money bank into lucrative ventures, Tencent China's management is going to invest in the capital...
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