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Question 3 The directors of X plc are comparing some of the company's year-end statistics with those of Yut p plc's latest profits have been severely reduced by an exceptional loss from the but Y ple's latest profits have been severely reduced by an exceptional loss from the closure plc. The board is focusing on the figures below. R+(RnRj) 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'. (5 Marks) (b) 'Y plc's earnings yield is lower than ours. This gives them the benefit of a lower cost of capital'. (5 Marks) (c) 'One of the factors which may explain Y plc's high P/E is the high financial gearing'. (d) 'The comparison of our own P/E ratio, gross dividend yield and gross ears) with those of Y ple is not really valid. The shares of the two companies have different nominal values'. (5 Marks) (e) 'These figures will not please our shareholders. The dividend yield is below the return an investor could currently obtain on risk-free government bonds'. (5 Marks) Question 3 The directors of X plc are comparing some of the company's year-end statistics with those of Yut p plc's latest profits have been severely reduced by an exceptional loss from the but Y ple's latest profits have been severely reduced by an exceptional loss from the closure plc. The board is focusing on the figures below. R+(RnRj) 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'. (5 Marks) (b) 'Y plc's earnings yield is lower than ours. This gives them the benefit of a lower cost of capital'. (5 Marks) (c) 'One of the factors which may explain Y plc's high P/E is the high financial gearing'. (d) 'The comparison of our own P/E ratio, gross dividend yield and gross ears) with those of Y ple is not really valid. The shares of the two companies have different nominal values'. (5 Marks) (e) 'These figures will not please our shareholders. The dividend yield is below the return an investor could currently obtain on risk-free government bonds