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The directors of X are comparing some of the company's year-end statistics with those of Y, the company's main competitor. X has had a fairly

The directors of X are comparing some of the company's year-end statistics with those of Y, the company's main competitor. X has had a fairly normal year in terms of profit but Y's latest profits have been severely reduced by an exceptional loss arising from the closure of an unsuccessful division. Y has a considerably higher level of financial gearing than X.

The board is focusing on the figures given below.

X Y

Share price 450c 525c

Nominal value of shares 50c 100c

Gross dividend yield 5% 4%

Price/earnings ratio 15 25

Proportion of profits earned overseas 60% 0%

In the course of the discussion a number of comments are made, including those given below.

Required

Discuss comments (a) to (d), making use of the above data where appropriate.

(a) 'There is something odd about the P/E ratios. Y has had a particularly bad year. Its P/E should surely be lower than ours'.

(b) 'One of the factors which may explain Y's high P/E is the high financial gearing.'

(c) 'The comparison of our own P/E ratio and gross dividend yield with those of Y is not really valid. The shares of the two companies have different nominal values.'

(d) 'These figures will not please our shareholders. The dividend yield is below the return an investor could currently obtain on risk-free government bonds.'

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