Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The research analyst at Needham & Company believes that Tootsie Roll Industries has a return on equity (ROE) of 11% with a beta (B) of

image text in transcribed
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 plowback 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 Tootise 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 plowback 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]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Commodity Option Pricing A Practitioner's Guide

Authors: Iain J. Clark

1st Edition

1119944511, 978-1119944515

More Books

Students also viewed these Finance questions