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# To avoid a hostile takeover attempt, the board of directors

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Senior Manager
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To avoid a hostile takeover attempt, the board of directors [#permalink]

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16 Feb 2005, 12:30
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To avoid a hostile takeover attempt, the board of directors of Wellco, Inc., a provider of life and health insurance, planned to take out large loans and use them to purchase a publishing company, a chocolate factory, and a nationwide chain of movie theaters. The directors anticipated that these purchase initially would plunge the corporation deep into debt, rendering it unattractive to those who wanted to take it over, but that steadily rising insurance rates would allow the company to pay off the debt within five years. Meanwhile, revenues from the three new businesses would enable the corporation as a whole to continue to meet its increased operating expenses. Ultimately, according o the directorsâ€™ plan, the diversification would strengthen the corporation by varying the sources and schedules of its annual revenues.

Which of the following, assuming that all are equally possible, would most enhance the chances of the planâ€™s success?

(A) A widespread drought decreases the availability of cacao beans, from which chocolate is manufacture, diving up chocolate prices worldwide.

(B) New government regulations require a 30 percent across-the-board rate rollback of all insurance companies, to begin immediately and to be completed within a five-year period.

(C) Congress enacts a statute, effective after six months, making it illegal for any parent not to carry health insurance coverage for his or her child.

(D) Large-screen televisions drop dramatically in price due to surprise alterations in trade barriers with Japan; movie theater attendance dwindles as a consequence.

(E) A new, inexpensive process is discovered for making paper pulp, and paper prices fall to 60 percent of their former level.
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16 Feb 2005, 12:40

Eliminated A - If they are buying a chocolate factory then a decrease in the availabitlity of cacao beans is a bad thing

Eliminate B - If they are depending on rising insurance rates then a roll back is a bad thing.

Eliminate C - Not really relevant

Eliminate D - If movie attendance dwindles they are going to have a hard time generating revenue from their movie theatres to bring them out of debt

Finally E..If paper prices fall then that is good for the publishing company which uses that paper.
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16 Feb 2005, 13:45
E also. Same reasoning as greenandwise. I couldn't understand B.
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16 Feb 2005, 14:53
My choice is (D).

(A) - company will make profits from chocolate indutry and may be lucrative for acquisition

(B) This will definitely deter buyers but will also be detrimental to company;s long term plan.

(C) then it is better to buy this company no matter what its other investments are. (this was my initial choice though )

(E) If this istrue then definitely the company is going to make profit. It is better to buy this company.

(D) Since insurance rates are increasing the company will make profit eventually. but this immidiate loss might deter those who want to buy this company now.
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16 Feb 2005, 15:25
OA is C. Could someone explain?
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16 Feb 2005, 19:16
'C' just mentions that there is a possibility to increase revenue becos of the new statute. This would be the choice only if we make an assumption that there is no competition for Wellco, Inc but on the other hand 'E' mentions that the paper prices have fallen by 40% thus bringing down the operating cost for the publishing company and thereby strengthening the corporation
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16 Feb 2005, 20:31
it is C because choice C states

"(C) Congress enacts a statute, effective after six months, making it illegal for any parent not to carry health insurance coverage for his or her child." which is exactly what the company wants as per statement

but that steadily rising insurance rates would allow the company to pay off the debt within five years.

how do you get steady income after the company plunges deep into debt, ofcourse with little bit of help from governoment statute

hope this helps
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Praveen

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17 Feb 2005, 01:42
praveen_rao7 wrote:
it is C because choice C states

"(C) Congress enacts a statute, effective after six months, making it illegal for any parent not to carry health insurance coverage for his or her child." which is exactly what the company wants as per statement

but that steadily rising insurance rates would allow the company to pay off the debt within five years.

how do you get steady income after the company plunges deep into debt, ofcourse with little bit of help from governoment statute

hope this helps

Yeah, that's the way Praveen!!!
Sometimes, this whole thing gets so interesting.
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17 Feb 2005, 07:49
Hi,

I cannot believe I messedup on this one. Too much thinking. I should have stuck to my initial choice.

Cheers to those who got it right.
Anand.
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17 Feb 2005, 11:21
I was confused with company's plan. I thought company's plan is to stay in debt so no take over would happen; but I am wrong, guess company's plan is to get out of debt in 5 yrs.
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# To avoid a hostile takeover attempt, the board of directors

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