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Stock Appreciation

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Stock Appreciation

by sumanr84 » Fri Feb 12, 2010 6:46 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?

1. Company X has a large market share in its industry.
2. Prior to the last 5 years, Company X had experienced similarly dramatic growth in sales associated with stable or improving operating margins.
3. The growth of Company X is likely to persist in the future.
4. The current price of the stock of Company X does not fully reflect the promising growth prospects of the firm.
5. The stock of Company X will outperform other stocks in the same industry.

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by Osirus@VeritasPrep » Fri Feb 12, 2010 6:50 am
I would choose D

A- Market share has nothing to do with stock speculation. This is why small growth stocks can experience exponential growth, without having large market share

B- This is the oppositie answer. If they had experienced this growth over the past 5 years, that would mean that their stock price would already reflect this trend

C- This is directly stated in the stimulus. This is an assumption, but this isn't the assumption that the conclusion is depended upon. The argument is structured in such a way that it is saying that hypothetically if this growth persists then the stock price will increase drastically

D- Correct

E- It doesn't matter what the other companies in the industry do. If the other stocks in the industry grow at a 80% rate, and company X only grows at 75%, the conclusion is still valid.
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by sumanr84 » Sat Feb 13, 2010 12:02 am
Well done osirus, Below is the expln in MGMAT,

The argument concludes that the stock of the firm will experience rapid growth. The basis for this claim is that the firm has shown strong historical performance that is likely to continue in the future. The stock will appreciate dramatically in the future as a result only if it has not already appreciated in anticipation of the company's expected growth.

(A) The argument focused on the potential for stock appreciation rather than company weight in the industry. A company with a large market share may well experience poor stock performance, while a company with a small market share may continue to grow and increase in value.

(B) Since the conclusion of the argument is made regarding the future outlook, it is not necessary to assume that the company had been growing, or had even existed, prior to the past 5 years. A new firm that has been in existence for only 5 years may well present an excellent investment opportunity.

(C) This statement is explicitly stated in the argument and therefore does not have to be assumed.

(D) CORRECT. If this assumption were not true, i.e. if the current stock price already reflects future growth prospects, then the premise that the company will experience high growth is certainly insufficient to warrant future stock price appreciation, since all of this growth would already be reflected in the current price. It is necessary to assume that the current price of Company X stock does not yet reflect the promising growth prospects of the firm, allowing the possibility that the stock price will rise further.

(E) Note that the argument makes a claim about the absolute return of stock X rather than its return relative to the industry. Therefore, to justify the rapid growth in the stock price, it is not necessary to assume that the company will outperform its competitors. For example, if the industry itself is growing very rapidly, other companies in the industry can experience just as rapid appreciation in stock prices.
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by joseph32 » Sun May 15, 2016 11:26 pm
I feel the answer will be D
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