Events & Promotions
|
|
GMAT Club Daily Prep
Thank you for using the timer - this advanced tool can estimate your performance and suggest more practice questions. We have subscribed you to Daily Prep Questions via email.
Customized
for You
Track
Your Progress
Practice
Pays
Not interested in getting valuable practice questions and articles delivered to your email? No problem, unsubscribe here.
Nov 1912:30 PM EST
-01:30 PM EST
Learn how Keshav, a Chartered Accountant, scored an impressive 705 on GMAT in just 30 days with GMATWhiz's expert guidance. In this video, he shares preparation tips and strategies that worked for him, including the mock, time management, and more
Nov 1811:00 AM PST
-12:00 PM PST
Join us in a live GMAT practice session and solve 30 challenging GMAT questions with other test takers in timed conditions, covering GMAT Quant, Data Sufficiency, Data Insights, Reading Comprehension, and Critical Reasoning questions.
Nov 2001:30 PM EST
-02:30 PM IST
Learn how Kamakshi achieved a GMAT 675 with an impressive 96th %ile in Data Insights. Discover the unique methods and exam strategies that helped her excel in DI along with other sections for a balanced and high score.
Nov 2211:00 AM IST
-01:00 PM IST
Do RC/MSR passages scare you? e-GMAT is conducting a masterclass to help you learn – Learn effective reading strategies Tackle difficult RC & MSR with confidence Excel in timed test environment- Nov 23
11:00 AM IST
-01:00 PM IST
Attend this free GMAT Algebra Webinar and learn how to master the most challenging Inequalities and Absolute Value problems with ease. 
Nov 2407:00 PM PST
-08:00 PM PST
Full-length FE mock with insightful analytics, weakness diagnosis, and video explanations!
Nov 2510:00 AM EST
-11:00 AM EST
Prefer video-based learning? The Target Test Prep OnDemand course is a one-of-a-kind video masterclass featuring 400 hours of lecture-style teaching by Scott Woodbury-Stewart, founder of Target Test Prep and one of the most accomplished GMAT instructors.
Updated on: 02 Oct 2023, 12:36
Originally posted by Sajjad1994 on 09 Mar 2020, 08:24.
Last edited by BottomJee on 02 Oct 2023, 12:36, edited 2 times in total.
Last edited by BottomJee on 02 Oct 2023, 12:36, edited 2 times in total.
Moved to new forum
Kudos
Bookmarks
James: Additional loans do not account for an insignificant part of why investors have bid up the probability of the company defaulting on existing loans.
Alexis: Company shareholders are not as likely as CEOs to take out additional loans.
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
95%
(hard)
Question Stats:
44% (03:06) correct
56%
(02:40)
wrong
based on 205
sessions
History
Date
Time
Result
Not Attempted Yet
James: The price of credit defaults swaps (CDS) for ABC company is exploding to the upside. Credit default swaps are effectively insurance contracts on the possibility of a company defaulting on its loans. CDS prices have gone up, partly because ABC took out more loans than they can handle. These additional loans increase the risk of default and are passed on to CDS investors in the form of more expensived insurance premiums. Therefore, reducing the quantity of unnecessary loans will be effective in lowering the price of credit default swap contracts.
Alexis: In many cases, the unnecessary loans that you mention are decisions made by upper management on behalf of the company. CEO's will often choose the financing option that maximizes the debt to equity ratio and potential valuation of the company, but may not necessarily benefit the company. As a result, in order to succeed in reducing the price of credit default swaps, we should allow the company's board of direcctors to vote on which form of financing the company should allow and which forms it shoud not allow.
In the table below, identify the assumptions upon which each person's argument depends. Choose one option for each column.
Alexis: In many cases, the unnecessary loans that you mention are decisions made by upper management on behalf of the company. CEO's will often choose the financing option that maximizes the debt to equity ratio and potential valuation of the company, but may not necessarily benefit the company. As a result, in order to succeed in reducing the price of credit default swaps, we should allow the company's board of direcctors to vote on which form of financing the company should allow and which forms it shoud not allow.
In the table below, identify the assumptions upon which each person's argument depends. Choose one option for each column.
| James | Alexis | Statements |
| CEOs are generally able to pick out, with consistent reliability, which loans and financing options would be best for the company. | ||
| Additional loans do not account for an insignificant part of why investors have bid up the probability of the company defaulting on existing loans. | ||
| Credit default swap prices in other industries such as oil & gas and retail, have been lowered by reducing the number of additional loans taken out by the company. | ||
| Company shareholders are not as likely as CEOs to take out additional loans. | ||
| Credit default swap prices have increased three times as fast in the past 3 years than they have over the past decade. |
ShowHide Answer
Official Answer
James: Additional loans do not account for an insignificant part of why investors have bid up the probability of the company defaulting on existing loans.
Alexis: Company shareholders are not as likely as CEOs to take out additional loans.
09 Mar 2020, 08:47
Kudos
Bookmarks
James: Additional loans do not account for an insignificant part of why investors have bid up the probability of the company defaulting on existing loans.
Since this additional loans increase the risk of default and are passed to CDS
Alexis: Company shareholders are not as likely as CEOs to take out additional loans.CEO and board of directors plan on the loans and the borrowing part
Posted from my mobile device
Since this additional loans increase the risk of default and are passed to CDS
Alexis: Company shareholders are not as likely as CEOs to take out additional loans.CEO and board of directors plan on the loans and the borrowing part
Posted from my mobile device
21 Jun 2024, 19:26
Kudos
Bookmarks
Hello from the GMAT Club BumpBot!
Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).
Want to see all other topics I dig out? Follow me (click follow button on profile). You will receive a summary of all topics I bump in your profile area as well as via email.
Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).
Want to see all other topics I dig out? Follow me (click follow button on profile). You will receive a summary of all topics I bump in your profile area as well as via email.
