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30 Jul 2019, 03:41
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A
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
65%
(hard)
Question Stats:
49% (01:22) correct
51%
(01:31)
wrong
based on 440
sessions
History
Date
Time
Result
Not Attempted Yet
Stock analyst: "We believe Company A's stock will appreciate at 35% a year for the next 5 to 7 years. Company A just became the leader in its industry and we expect its sales to grow at 8% a year."
Commentator: "But how can the stock's price be expected to grow more quickly than the company's underlying sales?"
Which of the following facts would best support the stock analyst?
A. The company's expenses will be declining over the next 5 to 10 years.
B. The company just won a patent on a new product.
C. Company A's stock is currently overvalued by a significant amount.
D. The 5 to 7 year time frame is too long for anyone to accurately forecast.
E. Company A's industry peer group is expected to experience stock appreciation rates of 30% over the same time horizon.
Commentator: "But how can the stock's price be expected to grow more quickly than the company's underlying sales?"
Which of the following facts would best support the stock analyst?
A. The company's expenses will be declining over the next 5 to 10 years.
B. The company just won a patent on a new product.
C. Company A's stock is currently overvalued by a significant amount.
D. The 5 to 7 year time frame is too long for anyone to accurately forecast.
E. Company A's industry peer group is expected to experience stock appreciation rates of 30% over the same time horizon.
30 Jul 2019, 08:02
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Bunuel
Stock Price Appreciation = Anticipation of Future profit....
The stock analysts reasoning about increase in stock prices has been criticized by the commentrator on the grounds that Sales (Revenue) during the same period , so how can the profits of the firm increase...
Do rememeber , Profit = Revenue - Expenses...
Herer (A) only talks about decrease in expenses leading to increase in profitability of the firm....
(B) Winning patents will have no effects on the profitability of the firm....
(C) Overvaluation of stock - Out of scope.
(D) Forecasting within a span of 5 to 7 years , too big timeframe - Out of scope , Irrelevant.
(E) Comparison with peer groups is out of scope as profitabliity of a firm has got nothing to do with its peers...
Hence IMHO (A)
25 Sep 2025, 02:13
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Bunuel
The best fact to support the stock analyst is A. The company's expenses will be declining over the next 5 to 10 years.
Here's the reasoning:
- Stock Price vs. Sales Growth: A company's stock price appreciation is generally tied to its profit growth, not just its sales growth. Profit (or net income) is calculated as Revenue (Sales) minus Expenses.
- The Analyst's Claim: The analyst forecasts 35% stock appreciation with only 8% sales growth. This implies that profits must be growing much faster than 8%.
- Impact of Declining Expenses (Option A): If the company's expenses are declining while sales are still growing (even at a modest 8%), the profit margin will expand significantly, causing profit (and thus, expected stock value) to grow much faster than sales.
- Example: If sales are $$$100 and expenses are $$$90 (Profit $$$10), and then sales grow to $$$108 (8% growth) and expenses decline to $$$80, the new profit is $\$$28. Profit has grown by 180% ($\frac{28-10}{10}$), which is dramatically faster than the 8% sales growth, justifying a high stock appreciation forecast.
Why the other options are weaker:
- B. The company just won a patent on a new product: While a patent is good news, it doesn't directly explain why the stock appreciation should be so much higher than the expected sales growth (8%). The market may already have factored this in, or the product may not generate enough sales to bridge the massive gap between 8% and 35%.
- C. Company A's stock is currently overvalued by a significant amount: This would argue against the analyst, as an overvalued stock is expected to either appreciate slower or even decline, not grow at a massive 35%.
- D. The 5 to 7 year time frame is too long...: This is a general commentary on forecasting difficulty, not a factual piece of evidence supporting the specific 35% prediction.
- E. Company A's industry peer group is expected to experience stock appreciation rates of 30%...: This suggests the analyst's forecast might be reasonable within the industry, but it doesn't address the core question: How can this company's stock grow at 35% when its underlying sales only grow at 8%? It doesn't explain the mechanism for the profit acceleration.
Source: Google Gemini
