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) (c) If you were a corporate raider, would Tencent China be a good target for a takeover?(5 marks) (d) In your opinion, how would Tencent China’s decision to pay out a higher percentage of its earnings as dividends presently affect its future share price?

Answer rating: 100% (QA)

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