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To avoid a hostile takeover attempt, the board of directors [#permalink]
06 Aug 2006, 07:35
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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.
E drop in paper price lead to higher profit margin of publishing company
which enchance higher success rate of publishing company
and this publishing company is one of company's diversification portfolio
from statement conclusion,
Ultimately, according o the directorsâ€™ plan,
the diversification would strengthen the corporation by varying the sources and schedules of its annual revenues.
Meanwhile, revenues from the three new businesses would enable the corporation as a whole to continue to meet its increased operating expenses.
For the plan to succeed its imperative that the company meet its increased operating expenses.
If the price of paper falls drastically, the operating expense of the publishing business will be very less and hence the company can support it well.
If Congress enacted the statute suggested in (C), insurance rates would inevitably rise over the next few years, therefore keeping Wellco lucrative enough to pay off the debt incurred from its diversified investments, while, at the same time, protecting the company from a hostile takeover (at least on paper ).