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

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Intern
Joined: 02 Oct 2008
Posts: 12
To avoid a hostile takeover attempt, the board of directors [#permalink]

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03 Nov 2008, 11:49
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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.
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03 Nov 2008, 12:22
abhinav24 wrote:
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. weakens
(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. weakens
(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. hold
(D) Large-screen televisions drop dramatically in price due to surprise alterations in trade barriers with Japan; movie theater attendance dwindles as a consequence. weakens
(E) A new, inexpensive process is discovered for making paper pulp, and paper prices fall to 60 percent of their former level. stronger than C

E ?
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Senior Manager
Joined: 31 Jul 2008
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03 Nov 2008, 12:28
C and E both are good options but C would weigh more here because C talks about the "core" business of the company
SVP
Joined: 17 Jun 2008
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03 Nov 2008, 12:45
I will go with E as C is described in some form in the stimulus.
Director
Joined: 23 May 2008
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03 Nov 2008, 12:59
E over C for me.

if more people must get insurance, competition will drive the rates down, but there will be more payouts
Manager
Joined: 15 Oct 2008
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03 Nov 2008, 13:00
I want to go with C.
Retired Moderator
Joined: 18 Jul 2008
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04 Nov 2008, 11:32
I will go with C.
Intern
Joined: 28 Oct 2008
Posts: 49

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04 Nov 2008, 14:24
IMO it's either B or C. I'll pick B just to go against you all.

Summary: BofDs want to make it seem like the corporation has too much debt in order to prevent a hostile takeover. It purchases 3 different companies and knows that these will ultimately help the parent company.

(A) A widespread drought decreases the availability of cacao beans, from which chocolate is manufacture, diving up chocolate prices worldwide.
This is just one factor out of four. The revenues from the other three can offset this one.
(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.
This factor can offset the increased revenue from the premiums making investors even more hesitant to pursue the hostile take over (debt would be higher). However, the BofDs know that the 3 companies will eventually help the parent company in the LT through diversification.
(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.
Wouldn't this choice justify a hostile takeover? The potential investors know that the revenues will increase in the future making the hostile takeover more likely?
(D) Large-screen televisions drop dramatically in price due to surprise alterations in trade barriers with Japan; movie theater attendance dwindles as a consequence.
Same reasoning as A.
(E) A new, inexpensive process is discovered for making paper pulp, and paper prices fall to 60 percent of their former level.
Same reasoning as A.
Director
Joined: 30 Jun 2007
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04 Nov 2008, 16:12
(A) A widespread drought decreases the availability of cacao beans, from which chocolate is manufacture, diving up chocolate prices worldwide. [Directly affects the director’s plans as increase in chocolate prices has an effect on sales]

(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. [insurance rate cuts can have impact on the company revenue]

(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. [Increase in child insurance coverage base – hold]

(D) Large-screen televisions drop dramatically in price due to surprise alterations in trade barriers with Japan; movie theater attendance dwindles as a consequence. [Directly affects the director’s plans as TV sales increase effect on movie going]

(E) A new, inexpensive process is discovered for making paper pulp, and paper prices fall to 60 percent of their former level. [Positive effect on publishing industry - Hold]

Between C and E: E – is as part of the director’s plan whereas C is anticipated in long term

E
Intern
Joined: 02 Oct 2008
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04 Nov 2008, 22:03
OA is C.
SVP
Joined: 17 Jun 2008
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04 Nov 2008, 22:18
Interesting. Only after seeing the OA, my brain starts analyzing correctly
E will be wrong as it goes against higher revenue. If the price falls, revenue will go down (assuming the same quantity of sale).
Senior Manager
Joined: 06 Jul 2007
Posts: 274

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05 Nov 2008, 00:11
scthakur wrote:
Interesting. Only after seeing the OA, my brain starts analyzing correctly
E will be wrong as it goes against higher revenue. If the price falls, revenue will go down (assuming the same quantity of sale).

well paper is the input for the publishing industry. if paper prices go down, so does the cost of publication and hence the revenue from the publishing business will increase. So, E gives us a scenario for increased profit from the publishing business.

however, the revenue from the core business (insurance) is the most important part of the plan. if something guarantees that the core business will bring in more revenue, that would be the deciding factor to help the business survive for additional years.

E only gives us part of the story. If C doesn't happen, then the company would collapse regardless of whatever happens with the other new ventures.
VP
Joined: 05 Jul 2008
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05 Nov 2008, 13:15
C is correct as already explained. all others drive income down either due to scarcity of supply material or abundance of supply material and there by drop of prices. As per the stimulus profits are achieved by diversifying and by generating revenues from various sources. Stimulus also mentions that insurance prices are constantly rising.
Manager
Joined: 24 May 2016
Posts: 170
Re: To avoid a hostile takeover attempt, the board of directors [#permalink]

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19 Aug 2016, 04:54
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.
Re: To avoid a hostile takeover attempt, the board of directors   [#permalink] 19 Aug 2016, 04:54
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