Over the past 5 years, Company X has posted double-digit growth in ann

Question

Over the past 5 years, Company X has posted double-digit growth in annual revenues, combined with a substantial improvement in operating margins. Since this growth is likely to persist in the future, the stock of Company X will soon experience dramatic appreciation.

The argument above is based on which of the following assumptions?

(A) Company X has a large market share in its industry.

(B) Prior to the last 5 years, Company X had experienced similarly dramatic growth in sales associated with stable or improving operating margins.

(C) The growth of Company X is likely to persist in the future.

(D) The current price of the stock of Company X does not fully reflect the promising growth prospects of the firm.

(E) The stock of Company X will outperform other stocks in the same industry.

skovinsky · Accepted Answer

An assumption is the missing link between the evidence and the conclusion. On assumption questions, we want to:

1) Paraphrase the conclusion;
2) summarize the evidence; and
3) predict what's required to connect the two.

Deconstructing this argument, we see that the author's conclusion is a prediction: the stock is about to skyrocket. The evidence that supposedly supports this prediction is that the company has had great growth over the last 5 years and that the growth is likely to continue.

We ask ourselves: "selves, what could the author be ignoring that would prevent the prediction from coming true?"

We answer ourselves: "selves, the author hasn't told us anything about the stock's previous performance - we don't know if its current value already reflects the previous growth and/or speculation of future growth."

Finally, we predict the answer: the author is assuming that the current stock price does NOT take into account the company's growth/potential for growth.

Armed with that prediction, we attack the choices and quickly and confidently select (D).

On a CAT, we'd barely even look at the remaining choices (when you have a prediction, the only question you ask is "does this match" - if a choice doesn't match, fly right by it). However, when the CAT is over, you always want to thoroughly review the questions, so let's slip into "review mode" for a moment.

Many people are tempted by choices like "c)The growth of Company X is likely to persist in the future." Here's something important to remember: an assumption is an  unstated  piece of evidence. Since the stimulus already tells us that (C) is true, the author doesn't need to assume it.

Our takeaway: we never question the evidence that's explicitly presented - the vulnerable parts of the argument are the assumptions, which the author didn't bother to write down on the page.

siyer · Answer

Use POE.

A)Company X has a large market share in its industry.
Irrelevant. Does not tell us how the value of the company's stocks will appreciate.

B)Prior to the last 5 years, Company X had experienced similarly dramatic growth in sales associated with stable or improving operating margins.
This tells us that the Sales increased when the operating margins improved. Does not say anything about stock value.

C)The growth of Company X is likely to persist in the future.
Restatement. Does not say anything about stock value.

E) The stock of Company X will outperform other stocks in the same industry.
Comparison with stocks of other companies is irrelevant.

D)The current price of the stock of Company X does not fully reflect the promising growth prospects of the firm.
Correct answer. Author is assuming that the price of the stock should be/will be higher due to the growth in revenues and improvement in operating margins.

Bunuel · Answer

OFFICIAL EXPLANATION

The argument concludes that the stock of the firm will experience rapid growth. The basis for this claim is that the firm has shown strong historical performance that is likely to continue in the future. The stock will appreciate dramatically in the future as a result only if it has not already appreciated in anticipation of the company's expected growth.

(A) The argument focused on the potential for stock appreciation rather than company weight in the industry. A company with a large market share may well experience poor stock performance, while a company with a small market share may continue to grow and increase in value.

(B) Since the conclusion of the argument is made regarding the future outlook, it is not necessary to assume that the company had been growing, or had even existed, prior to the past 5 years. A new firm that has been in existence for only 5 years may well present an excellent investment opportunity.

(C) This statement is explicitly stated in the argument and therefore does not have to be assumed.

(D) CORRECT.  If this assumption were not true, i.e. if the current stock price already reflects future growth prospects, then the premise that the company will experience high growth is certainly insufficient to warrant future stock price appreciation, since all of this growth would already be reflected in the current price. It is necessary to assume that the current price of Company X stock does not yet reflect the promising growth prospects of the firm, allowing the possibility that the stock price will rise further.

(E) Note that the argument makes a claim about the absolute return of stock X rather than its return relative to the industry. Therefore, to justify the rapid growth in the stock price, it is not necessary to assume that the company will outperform its competitors. For example, if the industry itself is growing very rapidly, other companies in the industry can experience just as rapid appreciation in stock prices.

akshathbs · Answer

Over the past 5 years, Company X has posted double-digit growth in annual revenues, combined with a substantial improvement in operating margins. Since this growth is likely to persist in the future, the stock of Company X will soon experience dramatic appreciation.

The argument above is based on which of the following assumptions?
a) Company X has a large market share in its industry.
b)Prior to the last 5 years, Company X had experienced similarly dramatic growth in sales associated with stable or improving operating margins.
c)The growth of Company X is likely to persist in the future.
d)The current price of the stock of Company X does not fully reflect the promising growth prospects of the firm.
e)The stock of Company X will outperform other stocks in the same industry.
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well to begin with this question is worthless , it requires you to know the terminology( growth company vs growth stock) ..!
k..coming back to the gmat world since this is an assumption question just use assumption negation technique..
a) company X does not have a large market share---don't give a rat's a**, move on..
b) since the whole stem talks abt a 5 yr span and the future it is irrelevent to talk outside tht time period
c) the growth of the company is not likely to persist in the future--contradicts the stem itself
d) Tthe current price fully reflects the promising growth prospects------aahaa!..if the current price reflects all the prospects then there is no reason for the share to be overpriced in the future..tht's whr a little knowlege abt stocks comes in handy!
e) useless crap..move on..

USCTrojan2006 · Answer

+1 D.

Negate the choices. C was already stated, so that one should be crossed off.

a is irrelevant
b deals with the past, also irrelevant to the conclusion which deals with the future.
e While the stock can outperform its sector, it doesn't necessarily mean there will be a rise or appreciation.

gettinit · Answer

The argument made a sweeping next statement after substantial improvement in operating margins to saying that growth is likely to persist and that the company's stock price is going to increase dramatically. How is this supported by the argument? Its not, therefore an unstated premise or assumption has been made, only D provides an assumption relevant to this that says we assume that the current stock price does not reflect the full appreciation of the company (don't you love multiples

.

mvictor · Answer

ok, let's understand the argument: last 5y -> XX increase in R. improvement in operating margins. growth will continue in the future -> conclusion - stock will increase in value. what assumptions are made? 1. the price of the stock can be influenced by the increase in R and/or improvement in operating margins 2. the price of the stock does not reflect future increases in revenues (which is kind of unlikely if you think about

) The argument above is based on which of the following assumptions? A)Company X has a large market share in its industry. this one is out of scope. B)Prior to the last 5 years, Company X had experienced similarly dramatic growth in sales associated with stable or improving operating margins. growth prior the 5 years mentioned is out of scope. C)The growth of Company X is likely to persist in the future. this is an inference, and is actually stated in the argument. so can't be the assumption. D)The current price of the stock of Company X does not fully reflect the promising growth prospects of the firm. AHA! this is the 2 assumption identified by me. If you negate this answer choice - you see how the conclusion is shattered. E) The stock of Company X will outperform other stocks in the same industry. comparing with other stocks is out of scope. D seems to be the best.

robu · Answer

I think if we negate the option C , conclusion falls. IMO, answer shloud be C. How D can be the answer. pls. explain.

sowragu · Answer

Option C already stated in the argument.

"Over the past 5 years, Company X has posted double-digit growth in annual revenues, combined with a substantial improvement in operating margins.   Since this growth is likely to persist in the future,   the stock of Company X will soon experience dramatic appreciation."

Assumption is an unstated premise which should support the conclusion. But option C is the repetition of what has been already stated in the argument.

AryamaDuttaSaikia · Answer

"C" cannot be the answer since it is clearly stated in the argument that the growth is likely to persist in the future. Assumptions are unstated facts. Assumptions are always implicit never directly stated. Hence "C" can't be the assumption. It is stated that there has been a double digit growth in revenues and the author says that if this growth continues the stocks will experience dramatic appreciation. Hence the author assumes that stocks will appreciate further or in other words the current price of the stocks of company X does not fully reflect the promising growth prospects of the firm. Hence the answer is "D."

ImChasmish · Answer

What is the level of this question?

Bunuel · Answer

You can check the difficulty level of a question in the tags just above the first post. You can also check the stats in the original post. For this question the difficulty level is 600-700.

egmat · Answer

Correct Answer: option D

Passage Understanding 
- Over the past 5 years, company X has
 1. >=10% growth in annual revenue
 2. Substantial improvement in operating margin
- This growth is likely to persist in the future
- Conclusion: Stock of X will soon appreciate dramatically

In what scenario would stock of X not appreciate dramatically?

What if stock price is dependent on other factors apart from growth of the company? (say market condition)? Then, despite the high growth, due to other factors, the stock price may not increase dramatically.

Assumption 1: No other factor exists which can negatively impact the stock price nullifying the growth

What if the stock price at the moment already takes into account the expected/projected growth of the company? Then, the expected growth has already been factored into the current stock price, and therefore the stock price may not increase dramatically.

Assumption 2: The current stock price does not already factor in the projected/expected growth of X

Option Choice Analysis 
(A) Company X has a large market share in its industry.
Irrelevant to this argument

B)Prior to the last 5 years, Company X had experienced similarly dramatic growth in sales associated with stable or improving operating margins.
This does not tell us about stock price. Incorrect

C)The growth of Company X is likely to persist in the future.
This is actually given as fact in the passage. No new information. Cannot be the missing assumption!

D)The current price of the stock of Company X does not fully reflect the promising growth prospects of the firm. 
This is in line with our assumption 2, though worded differently. This means that the current stock price does not already factor in the projected growth of X.

E) The stock of Company X will outperform other stocks in the same industry.
Irrelevant. Stock performance of other companies has no impact on this argument.

Hope this helps.

VerbalBot · Answer

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Over the past 5 years, Company X has posted double-digit growth in ann

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