anilnandyala wrote:
Over the past 5 years, Company X has posted double-digit growth in annual revenues, combined with a substantial improvement in operating margins. Since this growth is likely to persist in the future, the stock of Company X will soon experience dramatic appreciation.
The argument above is based on which of the following assumptions?
a) Company X has a large market share in its industry.
b)Prior to the last 5 years, Company X had experienced similarly dramatic growth in sales associated with stable or improving operating margins.
c)The growth of Company X is likely to persist in the future.
d)The current price of the stock of Company X does not fully reflect the promising growth prospects of the firm.
e)The stock of Company X will outperform other stocks in the same industry.
An assumption is the missing link between the evidence and the conclusion. On assumption questions, we want to:
1) Paraphrase the conclusion;
2) summarize the evidence; and
3) predict what's required to connect the two.
Deconstructing this argument, we see that the author's conclusion is a prediction: the stock is about to skyrocket. The evidence that supposedly supports this prediction is that the company has had great growth over the last 5 years and that the growth is likely to continue.
We ask ourselves: "selves, what could the author be ignoring that would prevent the prediction from coming true?"
We answer ourselves: "selves, the author hasn't told us anything about the stock's previous performance - we don't know if its current value already reflects the previous growth and/or speculation of future growth."
Finally, we predict the answer: the author is assuming that the current stock price does NOT take into account the company's growth/potential for growth.
Armed with that prediction, we attack the choices and quickly and confidently select (D).
On a CAT, we'd barely even look at the remaining choices (when you have a prediction, the only question you ask is "does this match" - if a choice doesn't match, fly right by it). However, when the CAT is over, you always want to thoroughly review the questions, so let's slip into "review mode" for a moment.
Many people are tempted by choices like "c)The growth of Company X is likely to persist in the future." Here's something important to remember: an assumption is an
unstated piece of evidence. Since the stimulus already tells us that (C) is true, the author doesn't need to assume it.
Our takeaway: we never question the evidence that's explicitly presented - the vulnerable parts of the argument are the assumptions, which the author didn't bother to write down on the page.