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655-705 Level|   Business|   Long Passage|      
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In the early to mid-1980s, a business practice known as a "leveraged b 08 Jan 2019, 04:44
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'easy passage -close answers " is a case we met on gmat. we can understand the passage easily but the question is hard and many answer choices are close. this type of case is a hard case and we need to anticipate it

the key to success on this case is POE (power of elimination). we need to fully understand the passage and use POE to eliminate each of 4 answer choices. we need to realize that each of 4 choices are not consistent with the information in the passage. we have to under stand the passage 4 times to eliminate 4 answer choices. that is the reason for which gmat likes to present "easy passage-close answer" case because gmat can test our full understanding of the passage 4 times for each question. only when you understand the passage fully , you can eliminate one answer choice.

normally, POE is time consuming .

prethink is a technics we use on RC. but prethinking is used for easy question. we read question and we prethink an answer choice before going to answer choices to find a match. prethinking require us to understand the passage just 1 time but not 4 times. this technics is used for easy question or when the passage is harder to understand.

so, when you see an easy passage, be ready to do POE , calm down, take longer time for each question
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In the early to mid-1980s, a business practice known as a "leveraged b 09 Dec 2019, 06:23
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In the early to mid-1980s, a business practice known as a "leveraged buyout" became popular as a method for companies to expand without having to spend any of their own assets. The leveraged buyout was not without its problems, however, and in time it came to represent in the public imagination not only corporate ingenuity and success, but also excess and greed. Many of the main corporate figures of the 1980s saw spectacular rises and, perhaps inevitably, spectacular falls as they abused the leveraged buyout as a means to extraordinary financial gain.

A leveraged buyout entails one company purchasing another using the assets of the purchased company as the collateral to secure the funds needed to buy that company. The leveraged buyout allows companies to take on debt that their own assets would have been insufficient to secure in order to finance expansion. The benefit of the leveraged buyout is obvious: companies with insufficient funds can still expand to compete with larger competitors. The drawbacks, however, became apparent only after the fact: the purchased company must perform extraordinarily well in order to generate the capital to pay off the loans that made the purchase possible in the first place. When the purchased company underperforms, the buyer must somehow find the money to pay off the loans. If such funds are not obtained, the buyer may be forced to sell off the company, or parts thereof, for less than the purchase price. In these cases, the buyer is still responsible for repaying the debt that is not covered by the sale price. Many of these deals resulted in the evisceration of the purchased companies, as subparts were sold to pay down the loans and employees were laid off to reduce costs and increase profits.

The most famous leveraged buyout is probably the 1988 purchase of RJR Nabisco by Kohlberg Kravis Roberts ("KKR"). The purchase price for the corporate giant RJR Nabisco was $25 billion, almost all of which was borrowed money. The takeover was "hostile," meaning that RJR Nabisco resisted any overtures from potential buyers. KKR ultimately succeeded by buying a controlling interest in RJR Nabisco, thereby obtaining voting control over the company. By the mid-1990s, though, KKR had seen a reversal of fortune and was forced to sell off RJR Nabisco in order to relieve itself of the crushing debt load.

The 1980s were the heyday of the leveraged buyout, as lending institutions were willing to loan money for these ventures. When the deals turned out to be much riskier in life than on paper, the lenders turned away from the buyouts and returned to the notion that borrowers must possess adequate collateral of their own.
1. The primary purpose of the passage is to

(A) criticize the motives of those who use risky financial strategies

(B) challenge a common perception of financiers

(C) describe the evolution and application of a certain financial device

(D) explain the popularity of leveraged buyouts during a certain period

(E) argue that leveraged buyouts are detrimental to overall financial health


2. The author mentions the RJR Nabisco case most probably in order to emphasize which of the following points?

A. Many lending institutions are no longer willing to support leveraged buyouts.

B. Leveraged buyouts can be successfully utilized to purchase large companies.

C. Leveraged buyouts are generally less successful in hostile takeovers than in non-hostile takeovers.

D. Leveraged buyouts contain major risks in addition to their benefits.

E. Kohlberg Kravis Roberts was a leader in the development of the leveraged buyout.


3. The passage provides support for which of the following statements?

A. Leveraged buyouts are utilized primarily by small companies.

B. Some companies purchased through leveraged buyouts fell short of their buyers' expectations.

C. Today, no banks or other lending institutions will finance leveraged buyouts.

D. Most leveraged buyouts bring significant financial rewards to the buyers.

E. Leveraged buyouts were responsible for much of the economic growth of the 1980s.

Show more

Official explanation

Question 1
The answer to a question that asks about "primary purpose" must take the entirety of the passage into account. Since the author never states an opinion about the subject of the passage, the primary purpose of the passage cannot be characterized by any verb that requires an opinion.

(A) This choice begins with "criticize", which requires an opinion.

(B)This choice begins with "challenge", which requires an opinion.

(C) CORRECT. The passage was concerned with describing how leveraged buyouts are used and how their status changed over time. This is reflected in this choice.

(D) This choice begins with "explain", which is neutral. However, the passage as a whole was not concerned with the "popularity of leveraged buyouts during a certain period."

(E) This choice begins with "argue," which requires an opinion.

Question 2
The RJR Nabisco example in paragraph three specifically follows the generalized case described in paragraph two: leveraged buyouts (LBOs) offered benefits but also introduced serious risks. The RJR Nabisco example serves to illustrate the general case discussed in the preceding paragraph.

(A) Though the last paragraph does mention that lending institutions are much less willing to allow LBOs, this is not why the author mentions the RJR Nabisco case. Rather, this is a consequence following from such failed LBOs.

(B) This may be true (and presumably some companies did use LBOs successfully), but the RJR Nabisco case is an example of a failed LBO, not a successful one.

(C) The fact that the RJR Nabisco deal was a hostile takeover is mentioned incidentally; the passage does not make a causal connection between the hostile takeover and the ultimate failure of the LBO. Moreover, as this is a single example that is not at all generalized in the passage, there is no basis for stating that LBOs for hostile takeovers are less successful in general.

(D) CORRECT. This choice reflects the thinking in our above analysis: though there are benefits to LBOs, there are also serious risks.

(E) This may have been true, but the passage does not make any reference to this information.

Question 3
The question itself is rather broad, so the best approach is to evaluate the choices and compare each one to the passage.

(A) The passage does not imply this.

(B) CORRECT. The reference to the sale of RJR Nabisco provides support for this choice. Presumably, Kohlberg Kravis Roberts did not purchase RJR Nabisco with the intention of having to sell it to pay off the loans used to buy it.

(C) Though tempting, this choice is incorrect because we do not have any information in the passage about the attitude of the banks towards leveraged buyouts today, only about their attitude during and immediately after their period of greatest popularity. Also, the language in this answer ("No banks . . .") is too extreme to be correct.

(D) The passage does not imply this.

(E) The passage does not imply this.
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In the early to mid-1980s, a business practice known as a "leveraged b 13 Dec 2020, 05:27
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For Q-1, the primary purpose the answer choice C mentions "evolution", where as the passage only mentions that "In the early to mid-1980s, a business practice known as a "leveraged buyout" became popular as a method for companies to expand without having to spend any of their own assets." It might have evolved before 1980's, but was used widely during 1980's.

Whereas, Option D mentions "popularity" and the passage discusses the pros and cons of the practice, hence we can infer that businesses were more cautious about the buyouts (and not boycotting it completely), but I could not relate to any section in the passage which mentions the loss in popularity.

GMATNinjaTwo, bm2201, MagooshExpert can you please shed some light?

Thanks.
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In the early to mid-1980s, a business practice known as a "leveraged b 15 Dec 2020, 05:10
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For Q-1, the primary purpose the answer choice C mentions "evolution", where as the passage only mentions that "In the early to mid-1980s, a business practice known as a "leveraged buyout" became popular as a method for companies to expand without having to spend any of their own assets." It might have evolved before 1980's, but was used widely during 1980's.

Whereas, Option D mentions "popularity" and the passage discusses the pros and cons of the practice, hence we can infer that businesses were more cautious about the buyouts (and not boycotting it completely), but I could not relate to any section in the passage which mentions the loss in popularity.

GMATNinjaTwo, bm2201, MagooshExpert can you please shed some light?

Thanks.
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Hi rocky620,

Let me know if this helps.

1. The primary purpose of the passage is to

Quote:
(C) describe the evolution and application of a certain financial device
Show more
Evolution means how something changes over a certain period of time. We can the author discussing "leveraged buyout" and how it became popular as a method for companies to expand without having to spend any of their own assets and how the 1980s were the heyday of the leveraged buyout, as lending institutions were willing to loan money for these ventures. Throughout the passage, the author discusses pros and cons, and that how easy it was for a company to expand without spending their own money and to turn away from the buy out when the deals turned risky.
I would focus on both evolution and application which makes this a better choice than D.


Quote:
(D) explain the popularity of leveraged buyouts during a certain period
Show more
D is correct, but doesn't serve the main purpose. The author just mentions that "leveraged buyout" was popular method for companies to expand, but doesn't fixate on that. He goes on to discuss the most famous leveraged buyout of RJR Nabisco by Kohlberg Kravis Roberts ("KKR") and also how it benefitted some companies and was riskier for others.
True that the method was popular, but the popularity is not the only thing that author discusses in the passage.

Thus B is a better answer.

Thanks.
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In the early to mid-1980s, a business practice known as a "leveraged b 15 Dec 2020, 05:32
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bm2201 got it now. I focused on the word evolution and mistook it for introduction.
Thanks.
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In the early to mid-1980s, a business practice known as a "leveraged b 10 Mar 2023, 23:36
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Quote:
1. The primary purpose of the passage is to

(A) criticize the motives of those who use risky financial strategies
(B) challenge a common perception of financiers
(C) describe the evolution and application of a certain financial device
(D) explain the popularity of leveraged buyouts during a certain period
(E) argue that leveraged buyouts are detrimental to overall financial health
Show more

The primary purpose of the passage is to describe the evolution and application of a certain financial device, specifically the leveraged buyout, and to discuss its advantages and disadvantages. It also mentions the famous example of the RJR Nabisco leveraged buyout and its eventual downfall. The passage does not criticize or challenge the motives of those who use risky financial strategies, argue that leveraged buyouts are detrimental to overall financial health, or describe the popularity of leveraged buyouts during a certain period as its sole purpose.

Why is D wrong:
While the passage does discuss the popularity of leveraged buyouts during a certain period (the 1980s), this is not the primary purpose of the passage. Rather, the passage aims to provide a general overview of what a leveraged buyout is, its advantages and disadvantages, and the RJR Nabisco leveraged buyout as a famous example of this practice. The passage also discusses the eventual drawbacks of leveraged buyouts and how lenders eventually turned away from this practice. Therefore, while the passage does touch on the popularity of leveraged buyouts during a certain period, this is not its primary purpose.
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In the early to mid-1980s, a business practice known as a "leveraged b 23 Jun 2023, 21:44
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1. The primary purpose of the passage is to

(A) criticize the motives of those who use risky financial strategies
(B) challenge a common perception of financiers
(C) describe the evolution and application of a certain financial device
(D) explain the popularity of leveraged buyouts during a certain period
(E) argue that leveraged buyouts are detrimental to overall financial health

I have a doubt in the answer option - C , it equates "leveraged buyouts" to financial device, but nowhere in the passage it has been mentioned "leveraged buyouts" to be a financial device.
In the first line it is said to be a "business practice" that could lead to financial gains/losses but how can we infer "leveraged buyouts" to be a financial device ??
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In the early to mid-1980s, a business practice known as a "leveraged b 24 Jun 2023, 23:32
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I have a doubt in the answer option - C , it equates "leveraged buyouts" to financial device, but nowhere in the passage it has been mentioned "leveraged buyouts" to be a financial device.
In the first line it is said to be a "business practice" that could lead to financial gains/losses but how can we infer "leveraged buyouts" to be a financial device??
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Official Explanation

1. The primary purpose of the passage is to

Difficulty Level: 700

The answer to a question that asks about "primary purpose" must take the entirety of the passage into account. Since the author never states an opinion about the subject of the passage, the primary purpose of the passage cannot be characterized by any verb that requires an opinion.

(A) This choice begins with "criticize", which requires an opinion.

(B) This choice begins with "challenge", which requires an opinion.

(C) CORRECT. The passage was concerned with describing how leveraged buyouts are used and how their status changed over time. This is reflected in this choice.

(D) This choice begins with "explain", which is neutral. However, the passage as a whole was not concerned with the "popularity of leveraged buyouts during a certain period."

(E) This choice begins with "argue," which requires an opinion.

Answer: C
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In the early to mid-1980s, a business practice known as a "leveraged b 07 Jul 2023, 22:44
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Q2 Leveraged buyouts contain major risks in addition to their benefits - Obviously this is the purpose of the particular passage. We might fall for B (the trap answer)
but, Leveraged buyouts can be successfully utilized to purchase large companies. - This maybe true as per passage but it is not the purpose of the passage
Q3 Some companies purchased through leveraged buyouts fell short of their buyers' expectations. - A few companies do fall short of the buyers expectations and they cause the downfall of the company
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In the early to mid-1980s, a business practice known as a "leveraged b 21 Aug 2024, 13:25
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