Both are alright - the idea would be clear if you consider the question forms:
1. BY what percent did X increase?: X increased BY 5%.
2. How much did X increase?: X increased 5%.

In the first case "5%" is a noun, the object of prepositional phrase "of 5%". The prepositional phrase "of 5%" as a whole is working as an adverbial phrase for the verb "increased".
In the second case "5%" itself is an adverb referring to the verb "increased".

ANSWER CHOICE ANALYSIS
Choice A: The results of the company’s cost-cutting measures are evident in its profits, which increased five percent during the first three months of this year after it fell over the last two years.
This choice has pronoun-antecedent number error as.

Choice B: The results of the company’s cost-cutting measures are evident in its profits, which had increased five percent during the first three months of this year after it had fallen over the last two years.
This choice has verb tense error. The verb tense “had increased” is written incorrectly in past perfect tense. The two events in the past are – falling of profits & increase in profits. The increase in profits is the later event. Thus, expressing it in past perfect tense is incorrect. Expressing the earlier event in past tense is correct – had fallen.

Also, this choice has pronoun-antecedent number error as in Choice A.

Choice C: The results of the company’s cost-cutting measures are evident in its profits, which have increased five percent during the first three months of this year after falling over the last two years.
No error. In this sentence, the use of present perfect tense is justified since this tense presents an event that started in the past and whose effect is still valid in the present time frame. Furthermore, in this sentence, the second event “it fell” has been converted into a modifier that modifies the verb “have increased”. The modifier – after falling over the last two years – presents the sequencing for the verb “have increased” as intended.

Choice D: The results of the company’s cost-cutting measures are evident in its profits, with a five percent increase during the first three months of this year after falling over the last two years.
This choice has modifier error. The modifier “with a five percent increase” non-sensically modifies the preceding clause. Per the intended meaning, it should modify the preceding noun – profits.

Choice E: The results of the company’s cost-cutting measures are evident in its profits, with a five percent increase during the first three months of this year after having fallen over the last two years.
This choice has modifier error as in Choice D. It also uses unnecessarily passive verb tense – having fallen.

Thus, Choice C is the correct answer.

Hello yash321,

I will be glad to help you with you this one.

Errors in Choice B:

1. Verb Tense Error: The verb tense had increased is written incorrectly in past perfect tense. The two events in the past are – falling of profits and increase in profits. The increase in profits is the later event. Thus, expressing it in past perfect tense is incorrect. Expressing the earlier event in past tense is correct – had fallen.

2. Pronoun-Antecedent Number Error: The singular pronoun it has been used to refer to plural noun profits.


Errors in Choice D:

1. Modifier Error: The modifier with a five percent increase non-sensically modifies the preceding clause. Per the intended meaning, it should modify the preceding noun – profits.


Hope it helps.
Thanks.
Shraddha
_________________

A,B - "It" is referring to plural "profits"
D,E - The subjects is "results"
Distorts the meaning that the results fall over last 2 years not profits.

Hence, C is the answer.

Hi Daagh,

Thank you for such a good explanation. I have one query: can we never use with to modify the immediate subject ? why is with not modifying the profits here?
like which, with do not follow the touch rule ?

Please help me with this question.

Hello Everyone!

Let's tackle this question, one issue at a time, and narrow it down to the right answer! To begin, here is the original question, with any major differences between the options highlighted in orange:

The results of the company's cost-cutting measures are evident in its profits, which increased five percent during the first three months of this year after it fell over the last two years.

(A) which increased five percent during the first three months of this year after it fell
(B) which had increased five percent during the first three months of this year after it had fallen
(C) which have increased five percent during the first three months of this year after falling
(D) with a five percent increase during the first three months of this year after falling
(E) with a five percent increase during the first three months of this year after having fallen

After a quick glance over the options, there are a few key differences we can focus on:

1. which vs. with (modifiers)
2. increased / had increased / have increased (verb tense/subject-verb agreement)
3. it fell / it had fallen / falling / having fallen (verb tense/pronouns)

Since we're dealing with a modifier here, let's start with #1 on our list. This will determine if we should start the modifier with "which" or "with." Here is how each type of modifier works:

,which = noun modifier (the modifier must refer back to the noun right before the comma)
,with = adverbial modifier (the modifier must refer back to the clause before the comma)

Let's take a look at each option and determine if we need to use "which" or "with" here:

(A) The results of the company's cost-cutting measures are evident in its profits, which increased five percent during the first three months of this year after it fell
(B) The results of the company's cost-cutting measures are evident in its profits, which had increased five percent during the first three months of this year after it had fallen
(C) The results of the company's cost-cutting measures are evident in its profits, which have increased five percent during the first three months of this year after falling
(D) The results of the company's cost-cutting measures are evident in its profits, with a five percent increase during the first three months of this year after falling
(E) The results of the company's cost-cutting measures are evident in its profits, with a five percent increase during the first three months of this year after having fallen

After looking more carefully, it makes more sense to use the noun modifier beginning with "which" because it clearly refers back to what it's modifying: profits. Using the word "with" here changes the meaning! It says that the results increased five percent, not the profits! Therefore, we can eliminate options D & E because they use an adverbial modifier that isn't clear or logical to use here.

Now that we have 3 options left, let's move on to #3 on our list: whether or not to use the pronoun "it." The first thing we need to ask ourselves when it comes to pronouns is "do they agree in number?" In this case, the pronoun "it" is referring back to the word "profits." So - do they agree in number? NO! The word "profits" is plural, and the pronoun "it" is singular.

(A) which increased five percent during the first three months of this year after it fell
(B) which had increased five percent during the first three months of this year after it had fallen
(C) which have increased five percent during the first three months of this year after falling

We can eliminate options A & B because they have a pronoun-antecedent agreement problem. This leaves us with C as our correct option!


Don't study for the GMAT. Train for it.
_________________

in choice D and E, "with 5 percent...." do not refer to subject of the sentence.
this is absolute phrase. we do need to see grammar books for explanation of this phrase. i will explain it now

"with+noun+noun modifier" work as adverb modifying the main clause but do not refer the subject of the main clause.

with the government encouraging persons to learn English, I take an english class.

compare with the following adverb, which refers to subject and at the same time is adverb of the main clause.

learning english well, I learn gmat effectively. in this sentence, "learning english well" refers to subject "I", and work as adverb of the main clause.

because the absolute phrase do not refer to any noun in the main clause, is is called absolute. this phrase is like a second sentence regarding meaning. but , regarding grammatical role, the absolute phrase is not a sentence, so , it must attach to another sentence to be an adverb and it can not be a separate sentence.

I will tell some patterns using "with"
"with" is used to show method of the main clause. I learn English with a good book
"with" work as adjective. the girl with the red hair is my wife.
"with" work ad adverb. I learn English with a good teacher.

we need to know that "with+noun+noun" can be an absolute phrase and that "absolute phrase" dose not refer to any noun in the main clause. refering to no noun in the main clause can make the sentence unclear and, so, wrong.