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# Stock analyst: "We believe Company A's stock will appreciate

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Current Student
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Stock analyst: "We believe Company A's stock will appreciate [#permalink]

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22 Aug 2006, 10:07
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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.

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VP
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22 Aug 2006, 10:42
b/w A and B... B requires outside knowledge what a patent is... and also it doesn't say how long it is for... if is 3 years, then is this a guarantee that sales keep growing at 8%?

A specifically focuses on the argument's time period.

A

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Senior Manager
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22 Aug 2006, 10:54
I am going with E...

B was real close also, I rejected A because the time frame is 5-10 years as opposed to the stem which mentioned 5 to 7 years...

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Senior Manager
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22 Aug 2006, 11:02
i think i'll go for (B)

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Manager
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22 Aug 2006, 11:25
going with A here..

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VP
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22 Aug 2006, 12:10
GMATT73 wrote:
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.

A. growing sales and declining espenses widens the profit and widened profit justifies the stock price appreciation by 35%.

Other choices are either irrelavant or un-supported.

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Director
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22 Aug 2006, 14:05
Between A and B.

A could be wrong because leading industry sometime fails by spending its investments as expenses and net growth could be low in next few years too.

B. As u2lover explained no idea about patent details.

But stock analysts says that Company A just became the leader in its industry and we expect its sales to grow at 8% a year. The reason may be due to B.

So on test day I will go for B

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Senior Manager
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22 Aug 2006, 15:19
A , seems to be the best option..

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Manager
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22 Aug 2006, 17:10
I'm going for E.
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."
In the same way that the company's valuation for 3-5 years is independent from the sales (stock's price expected to grow more quickly than the company's underlying sales) it may naturally follow that other income statement factors like profit & company's expenses does not directly affect the judgement. So for me A is out.
As for B, we're not sure if this patent thing can cause a drastic change in the company's valuation for as long as 3-5 years
E: If the entire group's valuation will increase by 30%, then, being the industry leader, company A will therefore also follow this trend

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VP
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22 Aug 2006, 18:17
(E) Company A's industry peer group is expected to experience stock appreciation rates of 30% over the same time horizon

Stk Appreciation: 35% per yr. over 5-7 yrs
Sales : 8% per year.

Only E can explain why the stock will grow.

Other reason like patent would have increased sales by more than 8% and moreover is out of scope.

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Current Student
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22 Aug 2006, 21:03
u2lover wrote:
b/w A and B... B requires outside knowledge what a patent is... and also it doesn't say how long it is for... if is 3 years, then is this a guarantee that sales keep growing at 8%?

A specifically focuses on the argument's time period.

A

U2 Lovergirl is firing on all 12 cylinders this week!!! Both fast and accurate.

OA is A. Answer choices C and D weaken the analyst's argument. Answer choice E is irrelevant, because we do not know how the analyst believes Company A's stock will perform in comparison to its industry peer group over the next 5 to 7 years. It's possible that the analyst does not expect Company A to remain the leader for very long, so we cannot assume he expects it will outperform the sector. Choice B is not conclusive because it indicates the patent is on a new product and we do not know if the patent is for a product consumers will demand. Answer choice A is the best one available. If the revenues increase and the expenses decrease, then the company can significantly increase its profits and be more likely to enjoy a high stock price appreciation rate.

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CEO
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22 Aug 2006, 22:41
Late but its certainly A.
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VP
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22 Aug 2006, 22:48
GMATT73 wrote:
u2lover wrote:
b/w A and B... B requires outside knowledge what a patent is... and also it doesn't say how long it is for... if is 3 years, then is this a guarantee that sales keep growing at 8%?

A specifically focuses on the argument's time period.

A

U2 Lovergirl is firing on all 12 cylinders this week!!! Both fast and accurate.

OA is A. Answer choices C and D weaken the analyst's argument. Answer choice E is irrelevant, because we do not know how the analyst believes Company A's stock will perform in comparison to its industry peer group over the next 5 to 7 years. It's possible that the analyst does not expect Company A to remain the leader for very long, so we cannot assume he expects it will outperform the sector. Choice B is not conclusive because it indicates the patent is on a new product and we do not know if the patent is for a product consumers will demand. Answer choice A is the best one available. If the revenues increase and the expenses decrease, then the company can significantly increase its profits and be more likely to enjoy a high stock price appreciation rate.

Cant you look at it like this? Company A's industry peer group is expected to experience stock appreciation rates of 30% over the same time horizon and since company A is the leader in its group, a stock appreciation of 35% can be expected.

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Senior Manager
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23 Aug 2006, 03:21
Late but A here...

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Manager
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23 Aug 2006, 04:24
i'm with A

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Senior Manager
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23 Aug 2006, 04:43
(A) is just fine. (B) could have been a possibility if we knew more about what the patent could do to the company's sales/profits.
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Manager
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23 Aug 2006, 06:27
I don't know how much sense it makes to argue the OA, but I'm still with E.

Lower expenses do not necessarily mean a higher profit or a higher stock price - the stock price do not necessarily reflect the financial fundamentals.

Plus, at sales growing 8% for the next 5-7 years and stock price 35% a year there must be a strong optimism on the part on investor that accept the P/E lowering on a 5 year horizon hoping it might pay off 10 etc years down the line.
With E we are given the reason why stock price growth is so high. if 30% is the industry average, and the company is a leader, 35%.
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23 Aug 2006, 06:27
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