The research analyst at Needham & Company believes that Tootsie Roll Industries has a return on equity (ROE) of 11% with a beta (B) of 0.60. Tootsie Roll Industries plans to maintain indefinitely its plow back ratio of 0.58. The firm’s earnings this year (Eo) were equal to $1.20 per share.
The research analyst estimates that the expected return this year for the market Erm) will equal 12.5% and T-bills will offer a 2.5% return (r= 0.025). (a) Find the price at which a share of Tootsie Roll Industries should sell. [5 Points) (b) Calculate the P/E ratio for Tootsie Roll Industries. [3 Points) (c) Suppose the research analyst publishes a report stating that they believe that Tootsie Roll will soon raise its plow back ratio to 0.62. If you’re a current stockholder in Tootsie Roll should you purchase more stock or sell your position? Assume that the stock is currently trading at the value you found in Part (a). Explain your reasoning. (Hint: Earnings next year will change.] [8 Points]
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