Homework Answers
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Answer: (a) - (i) |
||
|
Percussion Ltd. |
||
|
Sl. No. |
Description |
Amount (in €) |
|
I. |
||
|
1. |
Sales |
29,250,000 |
|
2. |
Gross Profit (10% on Sales) |
2,925,000 |
|
3. |
General Expenses |
675,000 |
|
4. |
Profit Before Tax (PBT) |
2,250,000 |
|
5. |
Tax |
450,000 |
|
6. |
Profit After Tax (PAT) |
1,800,000 |
|
II. |
||
|
1. |
Profit After Tax (PAT) |
1,800,000 |
|
2. |
Total No. Of Shares |
720,000 |
|
3. |
Earnings per Share (1,800,000 ÷ 720,000) |
2.5 |
|
III. |
||
|
1. |
Market Price of Share |
190 |
|
2. |
Earnings per Share |
2.5 |
|
3. |
Price to Earnings Ratio (190 ÷ 2.5) |
76 |
|
Answer: (a) - (ii) |
|
If a Company has a higher PE Ratio, then it indicates that the prospects of the Company are rich. On the contrary it is also that the Company may result in a lower financial leverage and the stocks are possibly over-valuated. Theoretically speaking, if a Company increase its gearing, i.e., financial leverage, then it will lower the PE Ratio but substantially increase the Value of the Shares. This would in turn lead to a higher stock volatility. However, in reality, there are studies which has found that, if there is an increase in the leverage, the PE Ratio remains indeterminate. |
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