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

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Manager
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Stock analyst: We believe Company A s stock will appreciate [#permalink]

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05 Aug 2009, 02:09
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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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05 Aug 2009, 05:30
A. The company’s expenses will be declining over the next 5 to 10 years.
Declining expenses does not guarantee a stock appreciation of over 35% per year
B. The company just won a patent on a new product.
Patent may or may not help in appreciation of stock valueC. Company A’s stock is currently overvalued by a significant amount.
This would weaken the stock analyst's argument
D. The 5 to 7 year time frame is too long for anyone to accurately forecast.
This also would weaken the stock analyst's argument
E. Company A’s industry peer group is expected to experience stock appreciation rates of 30% over the same time horizon.
As the industry is expected to grow at over 30%, the analyst expects that the stock would appreciate more that the industry average

Hope this helps

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06 Aug 2009, 01:50
Confused!

A seems fine to me! - It is mentioned as a fact.
Higher sales and lower cost =>increase in profits => increase in valuation.

B Patent not sure will result in increase in profits. Unless cost decreases and sales increases with the help of patent. Also, can't assume that patent will directly result in the profits in the coming years.

E talks about the expectations and not a fact.
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06 Aug 2009, 03:02
Erukumk wrote:
A. The company’s expenses will be declining over the next 5 to 10 years.
Declining expenses does not guarantee a stock appreciation of over 35% per year
B. The company just won a patent on a new product.
Patent may or may not help in appreciation of stock valueC. Company A’s stock is currently overvalued by a significant amount.
This would weaken the stock analyst's argument
D. The 5 to 7 year time frame is too long for anyone to accurately forecast.
This also would weaken the stock analyst's argument
E. Company A’s industry peer group is expected to experience stock appreciation rates of 30% over the same time horizon.
As the industry is expected to grow at over 30%, the analyst expects that the stock would appreciate more that the industry average

Hope this helps

A should be the right answer instead of E. E fails to answer the fact 'how' the company expects to grow its share value more than its sales. 'A' answers the question, with increased sales and decreased cost, the net profit will be higher resulting to a increased share value.

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06 Aug 2009, 03:45
ankur55 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.

I go with E.

For me the catch is "Company A just became the leader in its industry". Now if other companies which shall be behind company A have 'stock appreciation rate' of 30% then the industry leader should definitely have something >30%.
The stock analyst is only saying about stock appreciation for A, giving sales figures is just a reason(which is apparently an 'expectation' of the analyst) to support his statement. E directly supports his statement rather than his reasons for his statement.

A >> Company's expenses shall decline. OK. Now for assuming that it will also increase net profit(and thereby assume stock appreciation) we have to assume that the sales of A will be atleast constant or greater than current sales. And we don't have any 'fact' about current sales or future sales of A.

Looks interesting. OA pls?

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06 Aug 2009, 05:45
I am risking on this one but i will go with C.

Although i know that answer is A or E.

In case of E if industry grows at 30% does not mean than leader will grow at higher percentage. in stock valuation this may not hold true.

but if stock is currently over valued, it means that the investor is ready to pay premium for it even today when it has not been leader, so now that its no. one the valuations would again go up and return on each unit would be higher, therefore stock price has to reach new equilibrium point where it again becomes over valued.

So all in all its being over valued today is representative of investor confidence and again thus stock price would rocket to 35% growth.

am i thinking too far . if answer is E, then pls dont beat me up!
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06 Aug 2009, 06:38
Target760 wrote:
I am risking on this one but i will go with C.

Although i know that answer is A or E.

In case of E if industry grows at 30% does not mean than leader will grow at higher percentage. in stock valuation this may not hold true.

but if stock is currently over valued, it means that the investor is ready to pay premium for it even today when it has not been leader, so now that its no. one the valuations would again go up and return on each unit would be higher, therefore stock price has to reach new equilibrium point where it again becomes over valued.

So all in all its being over valued today is representative of investor confidence and again thus stock price would rocket to 35% growth.

am i thinking too far . if answer is E, then pls dont beat me up!

OA is A
Can anyone explain this pls?

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06 Aug 2009, 06:46
ankur55 wrote:
Target760 wrote:
I am risking on this one but i will go with C.

Although i know that answer is A or E.

In case of E if industry grows at 30% does not mean than leader will grow at higher percentage. in stock valuation this may not hold true.

but if stock is currently over valued, it means that the investor is ready to pay premium for it even today when it has not been leader, so now that its no. one the valuations would again go up and return on each unit would be higher, therefore stock price has to reach new equilibrium point where it again becomes over valued.

So all in all its being over valued today is representative of investor confidence and again thus stock price would rocket to 35% growth.

am i thinking too far . if answer is E, then pls dont beat me up!

OA is A
Can anyone explain this pls?

Opps! got it worng. . what i seen is that the answer choice n CR has to refer to the info in Conclusion. . . and that no outside info should be brought in. . In case of A, though its apparent that lowering costs will give the higher rise in stock prices (becuase of better profits), in my opinion its not the main reason for it to be answer. the key point is that the period of next 5 to 10 yrs is mentioned in this option and that overlapsto the period of 5 to 7 years mentioned in the conclusion. i think thats the key for it to be answer choice.

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06 Aug 2009, 09:17
I will take a shot to explain, and critics are most welcome .
Quote:
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?

The blue part is significant. If you just want to answer that question, what will be the paraphrase if you know sales were to grow at 8% and profits(stock valuation) to grow at 35%.
Profits = Sales - Cost
Other factor is cost.

A. The company’s expenses will be declining over the next 5 to 10 years.
=> This seems fine to me.

B. The company just won a patent on a new product.
Patent:
==> Impact is unknown
=> Market of product from patent is unknown
=> 35% profit for 5 years from it is no where reflected
Too much assumption required to consider it as a reason for continuous growth for 5 years at very high rate.

C. Company A’s stock is currently overvalued by a significant amount.
==> Undermining. As overvalued ==> correction in valuation will decrease the stock value in the future.

D. The 5 to 7 year time frame is too long for anyone to accurately forecast.
==> Irrelevant

E. Company A’s industry peer group is expected to experience stock appreciation rates of 30% over the same time horizon.[/quote]
==> Stock analyst expect 35%
==> other analyst expect 30% (does it support the analyst point, does it answer the question in Blue? No
Even if they are expecting, the correlation of 35% growth and 8% sales is not answered.
= > it is also possible that other analyst have used the mentioned stock analyst's reasoning to reflect the figures.
= > It will be an assumption to make that other analyst are not using the same reasoning as the mentioned stock analyst, the reasoning that needs to be supported with extra premises.

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06 Aug 2009, 09:52
Target760 wrote:
I am risking on this one but i will go with C.

Although i know that answer is A or E.

In case of E if industry grows at 30% does not mean than leader will grow at higher percentage. in stock valuation this may not hold true.

but if stock is currently over valued, it means that the investor is ready to pay premium for it even today when it has not been leader, so now that its no. one the valuations would again go up and return on each unit would be higher, therefore stock price has to reach new equilibrium point where it again becomes over valued.

So all in all its being over valued today is representative of investor confidence and again thus stock price would rocket to 35% growth.

am i thinking too far . if answer is E, then pls dont beat me up!

Dude! Nice out of scope reasoning!
If stock is overvalued, it means that the company is expected(anticipated) to grow faster than the market figures. It is in general happen mostly on the quarter or fiscal cycle based results. 5 years is a too long for any company company to declare the results.
* What you are referring to is a technical analysis, which is for the short duration.
* When we talk about the 5 years, we generally use the fundamental analysis, expected sales, profits, costs in Balance sheets and Financial Statements.

HTH
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06 Aug 2009, 10:21
I think that most of the answers are iffy. (or at least I think it is)

What is the source of this question?

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07 Aug 2009, 01:36
I agree, the answers are not well drafted. And i would have voted for B

whatthehell wrote:
I think that most of the answers are iffy. (or at least I think it is)

What is the source of this question?

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Last edited by snipertrader on 07 Aug 2009, 05:44, edited 1 time in total.

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07 Aug 2009, 05:39
'C' cannot be the answer as it fails to answer the 'how' part of the commentators question. The fact that the stock is currently overpriced do not answer how its stock price can be expected to grow more than its sales.

Also, in the question it is not mentioned that he the company will remain at the top of its business, may be other company will grow faster that that company.

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07 Aug 2009, 12:09
A, because it mentions one fact that it will help the company accumulate more than 8% growth in the stocks .... so profit + 8%, plus savings, that might get us close to 35%...it's a fact that surely will help.

not E because it talks about its peers, not necessarily the company itself.

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07 Aug 2009, 21:05
IMO A...

Since the expenses are going down the profit margins will improve...

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09 Aug 2009, 05:42
clear A

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19 Aug 2009, 14:07
Ok but we do not have an information in percentages in A it just says, the expenses will be lessened but what's the rate of this decrease ?

On the other hand E says the stock of peer group of Company X will appreciate , the market stock or real stock ? If it is real stock (inventories ) then E is just true making 30%+8%=38%.

Confusing question
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Re: Stock analyst: We believe Company A s stock will appreciate [#permalink]

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18 Jan 2012, 09:19
+1 A

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Re: Stock analyst: We believe Company A s stock will appreciate [#permalink]

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19 Jan 2012, 07:57
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. (this leads to an increase in profit .The only apprehension of the commentator is that how a 8% increase in sales leads to 35% increase in profit.This can be effectively explained by proving that the net profit which leads to an increase in stock price )correct
B. The company just won a patent on a new product.( Getting a patent does not guarantee it is ought to be helpful or increase the profit for the company )
C. Company A’s stock is currently overvalued by a significant amount.( If its overvalued then it decreases further rather improve )
D. The 5 to 7 year time frame is too long for anyone to accurately forecast.( out of context .if this is the case then the question cannot be asked in the first place )
E. Company A’s industry peer group is expected to experience stock appreciation rates of 30% over the same time horizon.(The increase in the prices of the peer group does not guarantee an increase in stock price of the company .There might be other factors due to which the stock prices of the peers increased .It cannot be said with certainty that these factors equally affect the price of the company too .)
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Re: Stock analyst: We believe Company A s stock will appreciate   [#permalink] 19 Jan 2012, 07:57
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