Question

 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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