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

Question

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

x2suresh · Accepted Answer

A --> diving up chocloate prices.. infact this may decrease the choclate sales.... and decrease the business.. least/no chances of plan success.
B --> rollback pricess..may decrease the company revenues. 
C --> law enacted.. more people will buy insurance.. more business for insurance company.. more revenues
C looks good.
D --> weaken.
E -->this may decrease operating cost of publishing company.. and increase revenues from publishing company.. We don't know how other two business will do..

KnewtonAlex · Answer

This question is absolutely terrible! The GMAT would NEVER give a situation with this many complexities in it, and then give so many defensible answers. The OA, C, would definitely help the company (its a health insurance company, after all, so a mandate to provide health insurance to children should be helpful), but choices A and E are both helpful for the company as well. Of course the drop in paper prices would help the publishing company, and a rise in chocolate prices would help the chocolate company.

We do NOT recommend anybody using this question as an honest learning experience.

What this question is going for is only evident in this sentnce: "...that steadily rising insurance rates would allow the company to pay off the debt within five years." This indicates that the plan hinges on a rise in insurance rates. Then, choice C is supposed to state that the new law, effective after only six months (which is less than five years), makes the plan more likely to work. This ALMOST makes sense, but not really. "Rising insurance RATES" does not match answer choice C: in fact, logically, if everybody were required to buy insurance, rates could go DOWN.

In fact, on the GMAT, what is far more likely to be asked about is the strategy about taking out large loans and then expecting the diversification of the company to allow them to be repaid. We at Knewton think that A,C, and E all accomplish this. This question is not GMAT-like.

noboru · Answer

I dont undestand why is C.

The plan was about taking large loans and use them to purchase a  publishing company, a chocolate factory, and a nationwide chain of movie theaters.

The question says which scenario would most enhance the chances of the  plan’s success ? so it has to be something concerning those 3 business, not concerning the insurance business itself...

PS: i was with E

mrsmarthi · Answer

Let me see if I can explain it little more.

Based on the question stem, the intention of the board of directors of Wellco is to take huge loans and buy three diverse businesses. They know that this action(taking loans) will put them into huge debts but atleast no one will dare to take over the WellCo(This way the plan is to temporarily bail out from takeover by other firm).In the course of the time(say 5 years) they will be steadily increase the life insurance which is their primary business. They can use this to pay off the debts. (The revenues that come out of the three businesses can meet the operating costs). Now to strengthen this plan I will look at ans choices which increases the life insurance rates.

(A) A widespread drought decreases the availability of cacao beans, from which chocolate is manufacture, diving up chocolate prices worldwide.  (This may convey a message that cholocate business might be very good but no information can be derived for other 2 businesses nor any thing that supports to increase the life insurance - Out of the game)  
(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 is infact weakening the plan since this clue conveys the message there is going to be a reduction in the insurance rates with immediate effect - Out of the game)  
(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. (This is strengthen the plan because, a rule will be in place after 6 months, where it is illegal for a parent not to carry the health coverage for his / her child. SO this will make the parents to buy the health coverage - an additional source of buisness which helps Wellco to go by their plan-  This is my pick )  
(D) Large-screen televisions drop dramatically in price due to surprise alterations in trade barriers with Japan; movie theater attendance dwindles as a consequence.  (This may convey a message that Movie theater business might not be doing well becuase of the TV proices dropping sharpely. So chances are that this may not contribute to the directors planned operating costs which is weakening the plan - Out of the game)  
(E) A new, inexpensive process is discovered for making paper pulp, and paper prices fall to 60 percent of their former level (This may convey a message that paper business might improve since the raw materials price is reduced. But not sure how the other business are doing nor it says anything about how the insurance rates can be improved. - Out of the game)

EBITDA · Answer

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.

navderm · Answer

I know this is after 10 years but 
1. Rise in chocolate price will not help the company. When the price rises for a commodity, it's sales go down, specially for non essential things like chocolate. 
2. The drop is the price of the paper is 1/3 of the total plan. Do you think just the decrease in paper would / could have effect enough to make the whole argument of circumventing a hostile takeover stronger ? It suffers an issue of a very narrow scope.

goofytiwari69 · Answer

a question to those who say C is the answer- if everyone has to buy health insurance coverage the a takeover becomes even more appealing bcoz we had a plan for paying debts and operational costs but now after 6 months sales would increase. Also if takeover becomes likely then the plan will not be a success.

ShreyasJavahar · Answer

It is pretty evident that C will in fact reignite interest in the company. If it is mandated that more people must be insured, business will certainly climb and spark the interest of investors. It weakens the plan.

SatvikVedala · Answer

Hi

I selected Option A. Initially I put A as a contender but my reasoning was what if company bankrupts because of debt within 6 months.

Did anyone make similar mistake. How can we answer such pre-thinking. let me know

regards
Satvik

KarishmaB · Answer

Responding to a pm:

Don't know the actual source of this question but it is a bad question.

First line: "To avoid a hostile takeover attempt,"
The main aim of the plan is to thwart a hostile takeover attempt. So plan would be successful if takeover is avoided. The plan is to buy 3 companies to avoid takeover. The later discussion talks about what they would do with the 3 companies afterwards and how they plan to ensure that the company stays a going concern and prospers.

GMAT, when talking about success of a plan, will focus on the main aim of the plan. None of the options mention that. 
Option (C) has actually nothing to do with the plan at all. It is something the govt is doing and will benefit the entire industry.

Even if we talk about how the plan will succeed at a later stage using the 3 companies, the Options (A) and (E) are somewhat similar. 
(A) Lower availability of cacao beans means higher cost price for them which drives up chocolate prices. Overall will it work in the company's favor? Depends on many factors. 
(E) Cheaper paper pulp means reduction in cost for publishing firm. Will the cost reduction be transferred to the end consumer, we don't know. Though I agree that the company has better financial control in this case as compared with (A).

Just ignore.

JC9 · Answer

I agree that this is a terrible example.

About choice C, what if nearly all parents have had coverage for their children before the statute is enacted? That means the company will not generate more premium because of this statute.

And choice E, I can't understand why it's incorrect. Why require that all three subsidiaries to be successful to strengh this argument? Choice C doesn't mention anything about other subsidiaries, and it's still correct.

inciduntprovident · Answer

I don't know whether it is well-known, but as an upstream producer like a factory, whose business is to purchase the raw materials and produce products or semi-finished products, you cannot benefit from the price increase of the(semi-finished)product which is caused by the price increase of the raw materials. That is why A is wrong. As for E, it is totally a misunderstanding that the price of paper will make any apparent difference to a publishing company. Come on, man that is not the Middle Ages when we had to use parchment to make a book.

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

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

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