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CEO: Over the past several years, we have more than doubled

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CEO: Over the past several years, we have more than doubled

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CEO: Over the past several years, we have more than doubled our revenues but profits have steadily declined because an increasing number of customers have failed to pay their balances. In order to compensate for these higher default rates, we will increase the interest charged on outstanding balances from an annual percentage rate (APR) of 9.5% to an APR of 12%. This increase will be sufficient to compensate for the current rate of defaults and allow us to increase our profits.

Which of the following statements, if true, would most seriously undermine a plan to increase interest rates in order to spur profitable growth?

(A) Many other companies have experienced a similar trend in their default rates.

(B) The company's operating expenses are above the industry average and can be substantially reduced, thus increasing margins.

(C) The increase in default rates was due to a rise in unemployment, but unemployment rates are expected to drop in the coming months.

(D) The proposed increase in the APR will, alone, more than double the company's profit margins.

(E) An increase in the APR charged on credit card balances often results in higher rates of default.

OA E

Source: Manhattan GMAT

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Deloitte, I think you have a typo. You marked the correct answer "incorrect."

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Option A - INCORRECT.
Several other companies have experienced a similar trend in their default rates, but have no claim that an increase in the Annual Percentage Rate (APR) has helped reduce the indispensable increase in Default rates.

Option B - INCORRECT.
If the company operating expenses are above the industry average and can be substantially reduced, thus increasing margins will only aid continuous production and running of the company but soonest the company might not be able to fund production and this may lead the company to bankrupt.

Option C - INCORRECT.
The increase in default rates was due to a rise in unemployment, but unemployment rates are expected to drop in the coming months. However, the increase in unemployment should not be the organization priority and also shouldn't be the reason why customers should not pay up their balance.

Option D - INCORRECT.
The proposed increase in the APR will more than double the company's profit margins, but how soon will this profit be accumulated?.

Option E - CORRECT.
This option has shed more light on why an increase in the APR charged on credit card balances often results in higher rates of default. It is obvious that without the increase in the APR charged on credit card balances customers are still unable to pay-up their balance, talk more of now that there is in increment in the APR. This suppose plan will so much increase the default rates, therefore this plan shouldn't be implemented rather alternatives on how to reduce default rates should be reviewed.



Last edited by deloitte247 on Fri Aug 24, 2018 1:51 am; edited 1 time in total

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