A new company can offer stocks in an initial public offering (IPO)

Question

A new company can offer stocks in an initial public offering (IPO) before the company has proven itself capable of generating long-term profits for its stockholders. Historically, if a compasny has seemed likely to generate profits, the stock price in the IPO has risen; if the company seemed less likely to generate profits, the stock price in the IPO has fallen. Today business analysts announced that the Tenon Corporation has turned a profit in the financial quarter just completed. Therefore, stock prices for the Tenon Corporation’s IPO, which is planned for next week, will rise.

The author’s conclusion about Tenon Corporation is based on faulty reasoning because it

A. depends on the assumption that what has been true in the past will hold true in the future.
B. relies on a line of reasoning that is circular.
C. confuses cause with effect.
D. overlooks cases in which the counter-example is true.
E. rests on a faulty comparison.

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jack5397 · Answer

IMO - A

POE

A. depends on the assumption that what has been true in the past will hold true in the future.
 Correct as what is historically true might not be true in today's case

B. relies on a line of reasoning that is circular.
 Eliminate. Circular reasoning is when author assumes and proves the same thing

C. confuses cause with effect.
 Eliminate. No cause and effect in this case

D. overlooks cases in which the counter-example is true.
 Eliminate. All the cases are explained clearly in the premise.

E. rests on a faulty comparison.
 Eliminate.No comparison being done as such

Freddy12 · Answer

Hi  Bunuel   GMATNinja 
I chose E because the question talks about generating long term profits. Whereas the company Tenon Corp has generated profit for the last quarter only. Thus it's irrelevant comparison.

Can you help?

Posted from my mobile device

DmitryFarberMPrep · Answer

The trouble with that reasoning is that the argument itself doesn't draw a comparison. It simply uses the profits from last quarter to predict a rise in stock price. However, the other premise only tells us to expect an increase in stock price when a company seems "likely to generate profits." So the argument is relying on the past to predict the future, as A describes.

Notice that the argument doesn't actually rely on the "long-term profits" part. On the contrary, we're told that an IPO happens before a company proves that it can provide such profits. Rather, we only have to look at whether the company seems likely to be profitable; we're not looking for an actual long-term record.

In any case, the author never directly compares one kind of profit to another, so we can't criticize it for a faulty comparison. We'd choose E for an argument that explicitly compared one thing to another when it didn't make sense to do so. For instance, what if I said "An ice cream sundae contains more nutrients than a blueberry, so ice cream is a healthier food than blueberries"? That's a faulty comparison. I didn't choose similarly-sized options, for one, and I didn't consider any ways in which the ice cream might be LESS healthy. So I made a direct comparison, but the reasoning was bad. I hope that helps!

Bunuel · Answer

PRINCETON REVIEW OFFICIAL EXPLANATION:

A

This is a reasoning question, so pay attention to how the author constructs his argument. He takes a historical trend and uses it to predict the outcome of a specific event. As you read through the answer choices, simply ask yourself, “Did he do that?”

(A) Yes. The author based his conclusion about Tenon on the assumption that what has been true in the past (in an IPO, a company that seemed likely to generate profits saw an increase in their stock price) will be true for Tenon.

(B) No. There is no circular reasoning here.

(C) No. There is no confusion of cause and effect—potential profits cause an increase in stock price.

(D) No. There are no counterexamples given, so this answer choice is out of scope.

(E) No. There is no comparison made in the argument, so this cannot be the credited response.

VerbalBot · Answer

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A new company can offer stocks in an initial public offering (IPO)

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A new company can offer stocks in an initial public offering (IPO)

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