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# To avoid a hostile takeover attempt, the board of directors

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VP
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To avoid a hostile takeover attempt, the board of directors [#permalink]

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21 Mar 2008, 09:25
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To avoid a hostile takeover attempt, the board of directors of Wellco, Inc., a provider of life and health insurance, planned to take out large loans and use them to purchase a publishing company, a chocolate factory, and a nationwide chain of movie theaters. The directors anticipated that these purchase initially would plunge the corporation deep into debt, rendering it unattractive to those who wanted to take it over, but that steadily rising insurance rates would allow the company to pay off the debt within five years. Meanwhile, revenues from the three new businesses would enable the corporation as a whole to continue to meet its increased operating expenses. Ultimately, according o the directors’ plan, the diversification would strengthen the corporation by varying the sources and schedules of its annual revenues.
Which of the following, assuming that all are equally possible, would most enhance the chances of the plan’s success?
(A) A widespread drought decreases the availability of cacao beans, from which chocolate is manufacture, diving up chocolate prices worldwide.
(B) New government regulations require a 30 percent across-the-board rate rollback of all insurance companies, to begin immediately and to be completed within a five-year period.
(C) Congress enacts a statute, effective after six months, making it illegal for any parent not to carry health insurance coverage for his or her child.
(D) Large-screen televisions drop dramatically in price due to surprise alterations in trade barriers with Japan; movie theater attendance dwindles as a consequence.
(E) A new, inexpensive process is discovered for making paper pulp, and paper prices fall to 60 percent of their former level.

Why E is not correct? Since paper cost will decrease, the publishing business can make profit.Please present your thoughts.
If you have any questions
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Manager
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21 Mar 2008, 09:43
my answer is C, b/c it contributes MOST to the claim.

A and E are somewhat right, but do not contribute as strongly to the plan as (C)

there's no correlation mentioned between paper price and publishing profit.
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23 Mar 2008, 01:59
zhenmaster wrote:
my answer is C, b/c it contributes MOST to the claim.

A and E are somewhat right, but do not contribute as strongly to the plan as (C)

there's no correlation mentioned between paper price and publishing profit.

C

I agree that A and E, even D(first I choose D) are really traps. When talking about profit, the common thought is that we talking about price. That is why A, E and D are very tricky. "There is no connection", I like this stuff
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23 Mar 2008, 02:30
yup it is C

E actually weakens the argument as there is a price dip in paper pulp production
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23 Mar 2008, 06:04
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I had selected E, before I reached the last line of your question.
Here is my analysis for the logic
Conclusion:The diversification would strengthen the corporation by varying the sources and schedules of its annual revenues.

Assumption:
i. The diversification (through the publishing house, chocolate factory and movie theatre) purchase initially would plunge the corporation deep into debt.
ii. It will make the company unattractive to those who wanted to take it over,
iii. steadily rising insurance rates would allow the company to pay off the debt within five years. iv. Revenues from the three new businesses would enable the corporation as a whole to continue to meet its increased operating expenses.

A: Affects point iv and hence would be able to bring about success
B: Governmnt roll back, would help the business if it were in deep debts. Such a situation is not evident from the problem
c: Makes the core business profitable, but might still not prevent the hostile bid take over (which is stated with the opening line "In order to avoid..." which is the root cause for diversification.
D: word negatively for point iv
E: Works positive for point iv and can be considered better option than C.

Can you provide the explaination for C as the answer.
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23 Mar 2008, 21:48
dushver wrote:
I had selected E, before I reached the last line of your question.
Here is my analysis for the logic
Conclusion:The diversification would strengthen the corporation by varying the sources and schedules of its annual revenues.

Assumption:
i. The diversification (through the publishing house, chocolate factory and movie theatre) purchase initially would plunge the corporation deep into debt.
ii. It will make the company unattractive to those who wanted to take it over,
iii. steadily rising insurance rates would allow the company to pay off the debt within five years. iv. Revenues from the three new businesses would enable the corporation as a whole to continue to meet its increased operating expenses.

A: Affects point iv and hence would be able to bring about success
B: Governmnt roll back, would help the business if it were in deep debts. Such a situation is not evident from the problem
c: Makes the core business profitable, but might still not prevent the hostile bid take over (which is stated with the opening line "In order to avoid..." which is the root cause for diversification.
D: word negatively for point iv
E: Works positive for point iv and can be considered better option than C.

Can you provide the explaination for C as the answer.

Dushver, You must be an ASUMPTION expert!

How to list all the assumptions in an argument?
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23 Mar 2008, 22:00
Irrespective the answer remains c. What is the explanation?
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23 Mar 2008, 22:32
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for the paper drop in price, it could make more money for the publishing business but not gurantee to make money because you need a good book to make money, paper cost can drop but if no good books being publish than no one would buy those books so profit is not gurantee. Same with coca beans. However if law requires paraents to buy health insurance than it is something that must happen so it gurantees profit (at least compare to other choices given) to company.
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24 Mar 2008, 07:48
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In order for the plan to work the debt has to make the corporation unattractive to those who want to take it over. But the company still has to be able to survive and repay the debt. For this two things must happen.

1. "steadily rising insurance rates would allow the company to pay off the debt within five years."

2. "revenues from the three new businesses would enable the corporation as a whole to continue to meet its increased operating expenses."

So to enhance the plans success we need an answer that will prove one of those two things.

A. Chocolate prices does nothing to tell us about the revenues from the chocolate factory.
B. A government mandated rollback of insurance rates ensures that the "steadily rising insurance rates" will not happen and weakens the plans success.
C. More people being forced to buy insurance supports a climate for "steadily rising insurance rates."
D. A decrease in movie theater attendance would most likely decrease revenues weakening the plan.
E. Again paper prices does not address revenue of the publishing company.

Another note, if you look at the wording the company needs "steadily rising insurance rates" and "revenues from the three new business." The only answer that address either one of those completely is C. Even if we assume that E will increase publishing profits that's only part of the answer, what about the other companies.

In other words if you had to choose between guaranteed rising insurance rates or guranteed revenues from just the publishing company which would you assume would most enhance the plans succes.
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24 Mar 2008, 08:01
I'll go for C. My reasoning is as follows:

If the insurance is made compulsory the effect will be increased revenue for the firm (remeber insurance is the firm's core business) this will enable it to pay of its debts even quicker.

WIthy E yes costs of producing papaer will fall but it doesn't say whether this will mean reduced prices for the customer or the prices will remain the same. It is open to interpretation. Two possible outcomes compared to C which has only one outcome.

Remember the question asks "Which of the following, assuming that all are equally possible, would most enhance the chances of the plan’s success?" The key word being most enhanced therefore even though E may be right you hjave to go for the best option-the most clear and concise one-which is C
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24 Mar 2008, 08:33

The OA is C
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26 Mar 2008, 13:11
ok but in C, wouldnt that make it more attractive for a hostile takeover?
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To avoid a hostile takeover attempt, the board of directors [#permalink]

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19 Aug 2016, 04:51
To avoid a hostile takeover attempt, the board of directors of Wellco, Inc., a provider of life and health insurance, planned to take out large loans and use them to purchase a publishing company, a chocolate factory, and a nationwide chain of movie theaters. The directors anticipated that these purchase initially would plunge the corporation deep into debt, rendering it unattractive to those who wanted to take it over, but that steadily rising insurance rates would allow the company to pay off the debt within five years. Meanwhile, revenues from the three new businesses would enable the corporation as a whole to continue to meet its increased operating expenses. Ultimately, according o the directors’ plan, the diversification would strengthen the corporation by varying the sources and schedules of its annual revenues.

Which of the following, assuming that all are equally possible, would most enhance the chances of the plan’s success?

A) A widespread drought decreases the availability of cacao beans, from which chocolate is manufacture, diving up chocolate prices worldwide.
Wellco has acquired a chocolate factory, whose business is to produce chocolate. If cacao beans become more scarce and chocolate prices increase, less people will consume chocolate. Hence, less chocolate will be produced and the revenues of the Company will decrease. Hence, this option decreases the chances of the plan's success.
B) New government regulations require a 30 percent across-the-board rate rollback of all insurance companies, to begin immediately and to be completed within a five-year period.
If regulations require the Board to be partially renewed every year, the incoming Board members may not agree with the decision of the current Board members. Hence, this option could decrease the chances of the plan's success.
C) Congress enacts a statute, effective after six months, making it illegal for any parent not to carry health insurance coverage for his or her child.
The revenues of the life and health insurance companies should increase. To the extent to which Wellco is able to capture some of this new revenues, it will be able to increase its revenues. Hence, this option should increase the chances of the plan's success.
D) Large-screen televisions drop dramatically in price due to surprise alterations in trade barriers with Japan; movie theater attendance dwindles as a consequence.
If movie theatre attendance decreases, the revenues from the chain of movie theatres will decrease. Hence, this option decreases the chances of the plan's success.
E) A new, inexpensive process is discovered for making paper pulp, and paper prices fall to 60 percent of their former level.
The discovery of this process entails that it is now less expensive to produce paper and, hence, to publish books. This could imply the entry of new competitors into the industry and drive existing companies' revenues and profits downwards.
But even if we suppose that no new competitors enter into the industry, why should we infer that the publishing company will maintain its prices while paper production costs have decreased? The company may well be forced to decrease selling prices in response to existing competitors' actions.
Ultimately, this option refers to an element that is secondary to the overall takeover defense strategy. Hence, option C, which refers to the core business and the most relevant element of the takeover defense strategy, would be preferred over this option.
To avoid a hostile takeover attempt, the board of directors   [#permalink] 19 Aug 2016, 04:51
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