V10-27

Question

Report : For the most recent quarter, TechCo announced earnings of $1.10 per share, an extremely strong result. This indicates the company has strong profitability and has delivered on its plan to launch new products and gain market share. Shares of the company fell 5% after announcing these results.
 
Which of the following helps explain why TechCo’s stock price fell after its strong earnings report?

A. In its earnings report, TechCo announced a new partnership with a producer of a commodity used to manufacture its products 
B. Prior to the announcement of earnings, it was expected that earnings would be $1.00 per share
C. The company’s operating margins increased when compared to the same quarter in the previous year
D. Investors believe that the company’s strong results cannot continue for much longer in the future
E. Several new startup companies have recently launched with the intention of competing with TechCo in its main business line

bb · Answer

Official Solution:

Report : For the most recent quarter, TechCo announced earnings of $1.10 per share, an extremely strong result. This indicates the company has strong profitability and has delivered on its plan to launch new products and gain market share. Shares of the company fell 5% after announcing these results.
 
Which of the following helps explain why TechCo’s stock price fell after its strong earnings report?

A. In its earnings report, TechCo announced a new partnership with a producer of a commodity used to manufacture its products 
B. Prior to the announcement of earnings, it was expected that earnings would be $1.00 per share
C. The company’s operating margins increased when compared to the same quarter in the previous year
D. Investors believe that the company’s strong results cannot continue for much longer in the future
E. Several new startup companies have recently launched with the intention of competing with TechCo in its main business line

(A) If TechCo formed a new partnership with a key commodity supplier, this would provide the company a more stable source of the commodity, and likely lower their costs. This could lead to greater earnings in the future so it would not be expected to cause the stock price to decrease. 
 
(B) If the company’s earnings exceeded expectations, the stock price would be expected to rise, not fall. 
 
(C) This answer choice only reinforces the statement that the company has strong profitability. If margins are rising, the stock price would be expected to increase, not decrease.
 
(D)  Correct . If investors do not expect the company’s strong result to continue, it could explain why the stock price decreased. 
 
(E) While new competitors may be a concern for TechCo, the answer choice does not state that the startup companies have launched products or gained market share. Thus, they are not likely to have an effect on TechCo’s earnings or cause a drop in TechCo’s stock price.

Answer: D

Nightfury14 · Answer

(D)  Correct . If investors do not expect the company’s strong result to continue, it could explain why the stock price decreased.

A belief or expectation (of Investors) cannot be related as an explanations for a decline in the stock prices.
It could be correct if there is conclusive evidence - "Experts/Stock analysts forecast that the company's strong results ..."

(E) While new competitors may be a concern for TechCo, the answer choice does not state that the startup companies have launched products or gained market share. Thus, they are not likely to have an effect on TechCo’s earnings or cause a drop in TechCo’s stock price.

Irrespective of the new competitors gain in market share/ launch of new products. Their entry may influence the stock prices of the that segment. Moreover option (E) says "competing with TechCo in its main business line"

I am not convinced with either answers.

sayantanc2k

sayantanc2k · Answer

Beliefs of the investors is a primary driver of the stock price. It may often overwhelm the actual performance of the company - this is the reason that many stocks are over-priced or under-priced and do not reflect it's true value - You may have noticed that in times of mergers and acquisitions, frequently financial experts are called to valuate the company- If the stock price were not driven by beliefs (assuming 100% rational behavior from the investors - something far away from reality), but just by hard facts, then just multiplying the stock price with the no. of stocks would accurately give the real equity value and the financial experts would not be required to be called - frequently this is not the case.

The entry of new competitors may drive the beliefs of the investor to an extent, but the effect would be more prominent and comparable to the effect of option D only after considerable success of the company, not just by the announcement of start-ups - it takes years to feel the effect on stock price of existing companies. Moreover, statistically majority of the start-up attempts are unsuccessful - so investors are not much influenced because of their entries.

AryanAan · Answer

If investors don't believe this then why will they not sell the shares before the result ?
This is a strange thought that they invested with a hope, hope fulfilled and now they have an opposite hope.

VachePBH · Answer

I think this is a  poor-quality  question and I don't agree with the explanation. "Investors believe that the company’s strong results cannot continue for much longer in the future", this answer will certainly lead to a drop in share price of the company. Yet, why the drop happened after the report?

ahumne · Answer

I think this is a  poor-quality  question and the explanation isn't clear enough, please elaborate. There's no mention of what brought about the change in investors minds after the report was announced.

iratclif · Answer

I think this is a  poor-quality  question and I don't agree with the explanation. Although obviously true that investors believing a company can't maintain strong results would be bad for the stock price, there is nothing in this argument that supports this answer. Everything is great, apparently, but for no reason investors decide to sell the stock?

I chose A because at least there is new information which could possibly cause investors concern (versus everything being seemingly great). There's no information regarding the partnership, perhaps it resulted in Techco taking on a lot of debt.

That being said, I don't think any of the answers are good but at least A introduces new info which could explain the apparent discrepancy.

VarunRai90 · Answer

It is a poor quality question. Th company has performed well and then out of nowhere, the investors believe the company will not do well in the future?

In option A, the company starts a new partnership. Maybe the new partnership is the cause of the change???? Still a maybe.... Hence this question is BAD!

Disha067 · Answer

I Agree, I Chose A thinking that , People might not like the new partner(may be because the partner has a bad name or any other reason) hence the value of the shares went down.

Posted from my mobile device

aviddd · Answer

I am not convinced D is the correct answer.

The question clearly asks "Which of the following helps explain why TechCo’s stock price fell after its strong earnings report?"

Why did investors suddenly decide that the company cannot sustain its growth? What was in the reports that made them believe so?

Though I was not convinced 100% about A, I chose A only because this explains why the report caused the decline in stock price.

Bunuel · Answer

This question has been retired and removed from Tests' database.

V10-27

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