Company: Tootsie Roll
-Few analysts follow Tootsie Roll. Assume that forecasted EPS for the next three years are $1.10, $1.15 and $1.20.
1) Tootsie Roll Industries Inc. NASDAQ's official website provides consensus earnings forecasts for the next three years. Use those forecasts and the financial statements to calculate the value per share of the firm using the residual income valuation approach. In particular, you should include the book value per share (make sure you show your work when calculating the number of shares outstanding) and the present value of the residual income for each of the next two years and the sum of the value of the residual income for subsequent years. Assume for the purposes of this calculation that the firm will pay no dividends and that the firm does not issue or repurchase shares (so the number of shares outstanding does not change). Make sure you calculate the expected return on common equity for each of the next three years as part of your calculation. Assume a required rate of return of 9%. To calculate the last term use the forecast for the third year, the book value from year 2, and the assumption of a 3 percent growth in residual income from year 3 forward. The formula for estimated value of the firm is:
V(0) = BV(0) + [(ROCE(1) -r ) * BV(0)] / [(1+ r)]
+ [(ROCE(2) - r ) * BV(1)] / [(1 + r)2]
+ [(ROCE(3) -r ) * BV(2)] / [(r - g) * (1 + r)2]
2) Repeat question 1 using your own earnings forecast from part 3 (which I attached). Assume that earnings grow by 6% from the year 1 forecast to year 2 and 6% from year 2 to year 3. Still assume 3% growth in earnings from year 3 to year 4 and in subsequent years. The required rate of return is still 9%.
(For Question #3, use your estimated economic value based on the analyst forecast)
3) Compare the estimated value per share to the stock price per share for the end of the fiscal year end. Use the market price from the fiscal year end date or the closest day to the fiscal year end (the previous day) when trading occurred, not the current market price. The per share price can typically be located at the firm's website or may be available from a third party provider (such as Yahoo Finance).