The directors of X ple are comparing some of the company's year-end statistics with those of Y ple, the company' main competitor. X plc has had a fairly normal year in terms of profit but Y ple's latest profits have been severely reduced by an exceptional loss from the closure of an unsuccessful division. Y plc has a considerably higher level of financial gearing than X plc. The board is focusing on the figures below. Share price Nominal value of shares Gross earnings yield Gross dividend yield Price/Earnings ratio Proportion of profits earned overseas X ple K450 K50 8.89% 5% 15 60% Y ple K525 K100 5.33% 4% 25.- 0% Rat(n-1 In the course of the discussion a number of comments are made, including those given below: Discuss comments (a) to (e), making use of the above data where appropriate. (a) 'There is something odd about the P/E ratios. Y plc has had a particularly bad year. Its P/E should surely be lower than ours'. (b) 'Y ple's earnings yield is lower than ours. This gives them the benefit of a lower cost of capital'. (c) 'One of the factors which may explain Y ple's high P/E is the high financial gearing'.

The directors of X ple are comparing some of the company's year-end statistics with those of Y ple, the company' main competitor. X plc has had a fairly normal year in terms of profit but Y ple's latest profits have been severely reduced by an exceptional loss from the closure of an unsuccessful division. Y plc has a considerably higher level of financial gearing than X plc. The board is focusing on the figures below. Share price Nominal value of shares Gross earnings yield Gross dividend yield Price/Earnings ratio Proportion of profits earned overseas X ple K450 K50 8.89% 5% 15 60% Y ple K525 K100 5.33% 4% 25.- 0% Rat(n-1 In the course of the discussion a number of comments are made, including those given below: Discuss comments (a) to (e), making use of the above data where appropriate. (a) 'There is something odd about the P/E ratios. Y plc has had a particularly bad year. Its P/E should surely be lower than ours'. (b) 'Y ple's earnings yield is lower than ours. This gives them the benefit of a lower cost of capital'. (c) 'One of the factors which may explain Y ple's high P/E is the high financial gearing'.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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