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

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

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08 Jul 2008, 13:27
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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 directors’ 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 plan’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.

lets solve this.
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Director
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08 Jul 2008, 13:42
spriya 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 directors’ 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 plan’s success?

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

the plan is to go into debt after buying the 3 buisnesses. If the chocolate price goes up then the company will start making profit and the chances of being taken over will rise. which directors dont want. WRONG ANS

(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.

This will boost the directors plan to take the company into debt for next five years. LOOKS GOOD

(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.

This plan will result in the debt to the company BUT after six months

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

Again this will make company profitable nad hence more prone to be taken over

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

Company is already in debt after gettign into 3 different industries.

lets solve this.

This is a tough one. The main aim is to take the company into debt NOW. Hence A, C and D can be eliminated. Confusion is between B and E. B is looking more promising.
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08 Jul 2008, 13:43
I think its C. because with C the company will have a direct affect on its debt paying ability.
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08 Jul 2008, 14:21
C looks good to me as well. Helps in paying off debts....as more will be forced to buy insurance.
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08 Jul 2008, 16:15
C is my pick as well as there are immediate returns from the addition of children and also the stimulus says that the rise in the insurance premiums will help pay off debts.

In B begin immediately means that some policies should be lowered by 30% , if not all to start with. Even if the company is adding new policies which will only be 70% of what the original price would have been, combined with the roll back, they may be where they are and as insurance premiums are rolled back as opposed to what the stimulus says, they wont be able to pay off debt in 5 years.
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08 Jul 2008, 18:41
I think its b/w B, C and D. B and D will initially lead to a decrease in profits for the company.

However, the directors want to increase debt incurred while making the purchase and not decrease profitability of any of the companies they purchase. They anticiapte that increase revenues from teh insurance company will pay off the debt incurred durign the purchase of the comapnies.
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08 Jul 2008, 19:06
The company is taking out loans to pay for 3 companies in order to increase their debt, making it unattractive to those who want to take it over.

The directors ANTICIPATE steadily rising insurance rates will allow them to pay of the debt.

Meanwhile revenues of the bought companies will allow them to meet their expenses.

Ultimately this plan will strengthen the company.

So there are three components that are needed: debt, rising insurance cost, and revenue from the 3 businesses.

The debt is guaranteed. If you take out loans and but the companies they will have debt.

The rising insurance costs are unknown. The directors ANTICIPATE but they are not certain.

The revenue from the business are questionable as well. Although past revenues can be used to predict future ones.

(A) A widespread drought decreases the availability of cacao beans, from which chocolate is manufacture, diving up chocolate prices worldwide.
Increased products for the chocolate factory will result in lower revenues and hurt the chances of the plan
(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.
This would hurt the chances of the anticipated rise in insurance rates and therefore hurt the chances of the plan
(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.
Correct, this will increase the chances of the rising insurance rates and help the chances of the plan
(D) Large-screen televisions drop dramatically in price due to surprise alterations in trade barriers with Japan; movie theater attendance dwindles as a consequence.
This will hurt the revenue for the movie theaters and decrease the chances of the plan
(E) A new, inexpensive process is discovered for making paper pulp, and paper prices fall to 60 percent of their former level.
This could result in an increase in the publishing company but would not be as beneficial as the rising insurance rates because we don't know what would happen with the other companies.
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09 Jul 2008, 19:13
OA is (C) Thanks for the explanation
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Re: CR- take over   [#permalink] 09 Jul 2008, 19:13
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