BREAKING: Target Test Prep releases Brand New 2026 On Demand GMAT prep course

Redeem

Company X will soon experience dramatic appreciation

This topic has expert replies
Post new topic Post Reply
Previous Topic Next Topic
Master | Next Rank: 500 Posts
Posts: 234
Joined: Tue May 31, 2016 1:40 am
Thanked: 3 times

Company X will soon experience dramatic appreciation

by Needgmat » Wed Aug 24, 2016 8:34 am
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.

OAD

Please explain by negation method. Also please explain why E is wrong.

Thanks,

Kavin
Top
Source: — Critical Reasoning |
User avatar
Legendary Member
Posts: 2135
Joined: Mon Feb 03, 2014 9:26 am
Location: https://martymurraycoaching.com/
Thanked: 955 times
Followed by:140 members
GMAT Score:800

by MartyMurray » Wed Aug 24, 2016 10:36 pm
Needgmat wrote:Please explain by negation method. Also please explain why E is wrong.

Thanks,

Kavin
This question has some issues. One of the answer choices simply exactly restates something said in the prompt, and the OA is not really an assumption that is necessary for the argument to work. Still, you can tell which answer is, supposedly, correct.

Using negation you would get something along the lines of the following.

(A) Negated: Company X does not have a large market share in its industry.

Market share may or may not affect company and stock price performance, and so this negation is irrelevant.

(B) Negated: Prior to the last five years Company X had not experienced similar growth.

This has no effect on the last five years or the future.

(C) Negated: The growth of Company X is not likely to persist.

This doesn't make sense. The argument stated that the growth is likely to persist. This answer choice is not typical of assumption question answer choices, in that it is a word for word restatement of something said in the prompt.

(D) Negated: The stock price already fully reflects the promising growth prospects of the firm.

Supposedly if this were the case, the stock would not appreciate dramatically, because even though the company is expected to continue to grow its revenues and operating margins, the stock price would already reflect that expected growth, and therefore would not have any reason to increase dramatically. So the argument is supposedly based on the the assumption that the stock price does not already fully reflect the growth prospects.

However, the truth is that stock prices that already reflect future growth can still appreciate dramatically in response to that growth, because the market is not perfect and because the price may appreciate to reflect the fact that some growth has actually occurred. So this CR question is not all that well constructed.

(E) Negated: The stock of Company X will not outperform the stocks of other companies in the same industry.

This does not change the argument. The stock price could appreciate dramatically without outperforming other companies' stocks. For one thing, for all we know, all of the stocks of all the companies in that industry will appreciate dramatically.

So as imperfect as it is, the only answer choice that makes sense is D.
Marty Murray
Perfect Scoring Tutor With Over a Decade of Experience
MartyMurrayCoaching.com
Contact me at [email protected] for a free consultation.
Top
Post new topic Post Reply
• Page 1 of 1