To avoid a hostile takeover attempt, the board of directors : GMAT Critical Reasoning (CR)
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# To avoid a hostile takeover attempt, the board of directors

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

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19 Sep 2005, 02:39
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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.

Why not A? Is it because cocoa beans can become availbale again and then the chacolate prices will comedown whereas the statute is a permanent one and hence the benefits arelong lasting and more?
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Director
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19 Sep 2005, 04:28
Wellco, Inc wants to do the following.

Fisrt, Be plunged deep inside debt.

Second, Come out of the debt.
...by help of the rising insurance rates

Third, Be stronger.
...by diversifying the sources and schedules of its annual revenues.

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

(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.

IMO, it is ok that (C) comes true whereas (A) does not. In this case, the company will eventually come out of the debt, though it won't be stronger.

However, it is not ok that (A) comes true whereas (C) does not. In this case, it is not likely that this company will come out of the debt.

Thus, my guess is (C).
Director
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19 Sep 2005, 18:54
gamjatang wrote:
Wellco, Inc wants to do the following.

IMO, it is ok that (C) comes true whereas (A) does not. In this case, the company will eventually come out of the debt, though it won't be stronger.

However, it is not ok that (A) comes true whereas (C) does not. In this case, it is not likely that this company will come out of the debt.

Thus, my guess is (C).

Didnt quite get this!
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19 Sep 2005, 20:17
Sorry, rahularaao. Excuse my poor English.

Let me try again.

(A) Wellco will make much money from the chocolate factory.
(C) Wellco will make much money from health insurance.

Here again, the main goal of Wellco is "jump into debt by purchasing the chocolate factory, and then come out of the debt". Making good money from the chocolate factory is optional.

Therefore, it would be good if Wellco makes much money from the chocolate factory. But it is not very necessary.

However, (C) is essential for Wellco to carry out its plan - to jump into debt and then COME OUT OF THE DEBT.
Director
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19 Sep 2005, 20:40
Got it buddy! Thanks for the explanation!
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Re: CR - Hostile takeover [#permalink]

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20 Sep 2005, 16:05

Rahul,

A won't help the company at all even though the chocolate prices went up the cost to procure the raw materials - cocoa beans also went up. The net profit to the company might be none.

rahulraao wrote:
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.

Why not A? Is it because cocoa beans can become availbale again and then the chacolate prices will comedown whereas the statute is a permanent one and hence the benefits arelong lasting and more?
Director
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20 Sep 2005, 20:26
gamjatang wrote:
Sorry, rahularaao. Excuse my poor English.

Let me try again.

(A) Wellco will make much money from the chocolate factory.
(C) Wellco will make much money from health insurance.

Here again, the main goal of Wellco is "jump into debt by purchasing the chocolate factory, and then come out of the debt". Making good money from the chocolate factory is optional.

Therefore, it would be good if Wellco makes much money from the chocolate factory. But it is not very necessary.

However, (C) is essential for Wellco to carry out its plan - to jump into debt and then COME OUT OF THE DEBT.

nice explanation, gamjatang! In retrospective, it's all very clear!!
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21 Sep 2005, 00:46
D for me

because if movies theather is going better and better they will use the publishing company to make advertisement for their own theater and then to seel chocoalte in their own theather full of people so all new companies make profit

I like that explanation. However I dont think it was the OA
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21 Sep 2005, 10:36
I will go with C.

what't the OA.
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21 Sep 2005, 10:46
gamjatang wrote:
Sorry, rahularaao. Excuse my poor English.

Let me try again.

(A) Wellco will make much money from the chocolate factory.
(C) Wellco will make much money from health insurance.

Here again, the main goal of Wellco is "jump into debt by purchasing the chocolate factory, and then come out of the debt". Making good money from the chocolate factory is optional.

Therefore, it would be good if Wellco makes much money from the chocolate factory. But it is not very necessary.

However, (C) is essential for Wellco to carry out its plan - to jump into debt and then COME OUT OF THE DEBT.

IMO C is the right answer, I agree with that, but do not agree very much with gamjatangs reason for rejecting A...Since so many people seem to agree with him correct me if I am wrong....

In case of C, since it is a new oppurtunity the company will benefit for sure..but in case of A, the price of the bean obviously increases due to drought and the company has to shell out more money to purchase the beans, though they will be selling it for more price later, so whether they will make more profit out of it is questionable.
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21 Sep 2005, 10:48
Antmavel wrote:
D for me

because if movies theather is going better and better they will use the publishing company to make advertisement for their own theater and then to seel chocoalte in their own theather full of people so all new companies make profit :wink:

I like that explanation. However I dont think it was the OA

Adding to that, if they sell more caffine and sugar filled choclate to people in theater, they will have to shell out more and more money for their insurance claims and they will go broke sooner than they thought...so choice D is eliminated....
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21 Sep 2005, 11:19
IMO C is the correct answer.

A. This is not good for Wellco as they have to pay the same debt but the incomes will be lower.

B. more taxes, less profit

C. The number of people paying premiums is higher so the revenues is higher as well. This is a good news for Wellco.

D. Same as A

E. Same as A
Director
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21 Sep 2005, 19:26
Awesome discussion! OA is C!
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23 Sep 2005, 00:37
ranga41 wrote:
Antmavel wrote:
D for me

because if movies theather is going better and better they will use the publishing company to make advertisement for their own theater and then to seel chocoalte in their own theather full of people so all new companies make profit :wink:

I like that explanation. However I dont think it was the OA

Adding to that, if they sell more caffine and sugar filled choclate to people in theater, they will have to shell out more and more money for their insurance claims and they will go broke sooner than they thought...so choice D is eliminated....

I knew you were going to tell me this....but don't forget that the company Wellco, Inc. is a provider of life and health insurance so the money will finally go to the same pocket

Ok, I stop now, enough. But sometimes it is nice to relax a little, even in the Gmat world
23 Sep 2005, 00:37
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