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Tough time with RC

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prachi18oct Master | Next Rank: 500 Posts
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Tough time with RC

Post Wed Jul 15, 2015 9:34 am
Hi Experts,

I am nearing to my GMAT appointment in early AUgust but don't see encouraging practice scores.
Primarily, with RCs I have a tough time. When I read the passage, I try to engage with it and understand the main point of each passage. After each paragraph, I halt and recall the summary of the passage. I feel confident many times that I have got the question this time. But when I review my answers, I find them incorrect according to the test makers.
I have read from the MGMAT guides and several posts that we need to justify each word of the chosen option.
Below is an example of an RC that I failed at. I understood the passage completely but the options were too e tricky.

Please read and give advise. I am in dire need of some help here.



In the early to mid-1980s, a business practice known as a "leveraged buyout" became popular as a method for companies to expand without having to spend any of their own assets. The leveraged buyout was not without its problems, however, and in time it came to represent in the public imagination not only corporate ingenuity and success, but also excess and greed. Many of the main corporate figures of the 1980s saw spectacular rises and, perhaps inevitably, spectacular falls as they abused the leveraged buyout as a means to extraordinary financial gain.
A leveraged buyout entails one company purchasing another using the assets of the purchased company as the collateral to secure the funds needed to buy that company. The leveraged buyout allows companies to take on debt that their own assets would have been insufficient to secure in order to finance expansion. The benefit of the leveraged buyout is obvious: companies with insufficient funds can still expand to compete with larger competitors. The drawbacks, however, became apparent only after the fact: the purchased company must perform extraordinarily well in order to generate the capital to pay off the loans that made the purchase possible in the first place. When the purchased company underperforms, the buyer must somehow find the money to pay off the loans. If such funds are not obtained, the buyer may be forced to sell off the company, or parts thereof, for less than the purchase price. In these cases, the buyer is still responsible for repaying the debt that is not covered by the sale price. Many of these deals resulted in the evisceration of the purchased companies, as subparts were sold to pay down the loans and employees were laid off to reduce costs and increase profits.
The most famous leveraged buyout is probably the 1988 purchase of RJR Nabisco by Kohlberg Kravis Roberts ("KKR"). The purchase price for the corporate giant RJR Nabisco was $25 billion, almost all of which was borrowed money. The takeover was "hostile," meaning that RJR Nabisco resisted any overtures from potential buyers. KKR ultimately succeeded by buying a controlling interest in RJR Nabisco, thereby obtaining voting control over the company. By the mid-1990s, though, KKR had seen a reversal of fortune and was forced to sell off RJR Nabisco in order to relieve itself of the crushing debt load.
The 1980s were the heyday of the leveraged buyout, as lending institutions were willing to loan money for these ventures. When the deals turned out to be much riskier in life than on paper, the lenders turned away from the buyouts and returned to the notion that borrowers must possess adequate collateral of their own.



The primary purpose of the passage is to

A)criticize the motives of those who use risky financial strategies
B challenge a common perception of financiers
C describe the evolution and application of a certain financial device
D explain the popularity of leveraged buyouts during a certain period
E argue that leveraged buyouts are detrimental to overall financial health


The author mentions the RJR Nabisco case most probably in order to emphasize which of the following points?

A Many lending institutions are no longer willing to support leveraged buyouts.
B Leveraged buyouts can be successfully utilized to purchase large companies.
C Leveraged buyouts are generally less successful in hostile takeovers than in non-hostile takeovers.
D Leveraged buyouts contain major risks in addition to their benefits.
E Kohlberg Kravis Roberts was a leader in the development of the leveraged buyout.


The passage provides support for which of the following statements?

A Leveraged buyouts are utilized primarily by small companies.
B Some companies purchased through leveraged buyouts fell short of their buyers' expectations.
C Today, no banks or other lending institutions will finance leveraged buyouts.
D Most leveraged buyouts bring significant financial rewards to the buyers.
E Leveraged buyouts were responsible for much of the economic growth of the 1980s.

Please suggest.

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Marty Murray Legendary Member
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Post Fri Jul 17, 2015 10:08 pm
Generally speaking people get tripped up by RC answer choices that they somehow feel are accurate representations or derivatives of what is said in the passage when actually they are not.

So one thing I am wondering is how careful you are about checking to see whether an answer choice really matches what is said in the passage.

For me to go much beyond that I would prefer to have some more information, such as the choices you chose when answering the questions you listed.

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prachi18oct Master | Next Rank: 500 Posts
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Post Sat Jul 18, 2015 6:43 am
Marty Murray wrote:
Generally speaking people get tripped up by RC answer choices that they somehow feel are accurate representations or derivatives of what is said in the passage when actually they are not.

So one thing I am wondering is how careful you are about checking to see whether an answer choice really matches what is said in the passage.

For me to go much beyond that I would prefer to have some more information, such as the choices you chose when answering the questions you listed.
Exactly the case with me.
In the posted question I marked below answers :-

1) I eliminated A,B, E due to words "crticize,argue,challenge" as the authour never intended to do so. I ruled out B as I thought the leverage buyout is a strategy and not a device. As I had read earlier, you need to justify every word in the correct option for it to be correct. Thats why I ruled out B. If the word "device" were not added, I would have chosen B as it is more close to what the passage intends.

Please tell me why it can be a device and how in future I can pick a correct strategy to eliminate the incorrect one?

2)Here I eliminated A,E easily
The passage mentioned that "corporate giant RJR Nabisco was $25 billion" so it is a large company. So I keep this.
There is no talk about non-hostile takeovers or any comparison is mentioned to C is out.
Since the example is "most famous leveraged buyout" and the passage mentions "KKR ultimately succeeded by buying a controlling interest in RJR Nabisco" I found B more compelling over D.

Please suggest a way to remove such ambiguities between two answer choices.

3) I eliminated A, D,E easily as they are not supported in the passage.
Between B and C, I agree C is strongly worded and I should have ruled it out based on my "justify-each-word-strategy". But B is not very clearly supported in the passage. As it a direct support question, I couldn't find direct support for it and thus eliminated.

Does the part "The drawbacks, however, became apparent only after the fact: the purchased company must perform extraordinarily well in order to generate the capital to pay off the loans that made the purchase possible in the first place. When the purchased company underperforms, the buyer must somehow find the money to pay off the loans. If such funds are not obtained, the buyer may be forced to sell off the company, or parts thereof, for less than the purchase price" hints at option B? I guesss Yes.
Is it similar to GMAT like RC and options?


Please advise.

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Post Mon Jul 20, 2015 4:21 am
prachi18oct wrote:
In the early to mid-1980s, a business practice known as a "leveraged buyout" became popular as a method for companies to expand without having to spend any of their own assets. The leveraged buyout was not without its problems, however, and in time it came to represent in the public imagination not only corporate ingenuity and success, but also excess and greed. Many of the main corporate figures of the 1980s saw spectacular rises and, perhaps inevitably, spectacular falls as they abused the leveraged buyout as a means to extraordinary financial gain.
A leveraged buyout entails one company purchasing another using the assets of the purchased company as the collateral to secure the funds needed to buy that company. The leveraged buyout allows companies to take on debt that their own assets would have been insufficient to secure in order to finance expansion. The benefit of the leveraged buyout is obvious: companies with insufficient funds can still expand to compete with larger competitors. The drawbacks, however, became apparent only after the fact: the purchased company must perform extraordinarily well in order to generate the capital to pay off the loans that made the purchase possible in the first place. When the purchased company underperforms, the buyer must somehow find the money to pay off the loans. If such funds are not obtained, the buyer may be forced to sell off the company, or parts thereof, for less than the purchase price. In these cases, the buyer is still responsible for repaying the debt that is not covered by the sale price. Many of these deals resulted in the evisceration of the purchased companies, as subparts were sold to pay down the loans and employees were laid off to reduce costs and increase profits.
The most famous leveraged buyout is probably the 1988 purchase of RJR Nabisco by Kohlberg Kravis Roberts ("KKR"). The purchase price for the corporate giant RJR Nabisco was $25 billion, almost all of which was borrowed money. The takeover was "hostile," meaning that RJR Nabisco resisted any overtures from potential buyers. KKR ultimately succeeded by buying a controlling interest in RJR Nabisco, thereby obtaining voting control over the company. By the mid-1990s, though, KKR had seen a reversal of fortune and was forced to sell off RJR Nabisco in order to relieve itself of the crushing debt load.
The 1980s were the heyday of the leveraged buyout, as lending institutions were willing to loan money for these ventures. When the deals turned out to be much riskier in life than on paper, the lenders turned away from the buyouts and returned to the notion that borrowers must possess adequate collateral of their own.



The primary purpose of the passage is to

The passage starts with describing a trend in para 1. In para 2, the passage defines leverage buyout along with its short comings. In para 3, with an example, states how risky leverage buyout can be.

A)criticize the motives of those who use risky financial strategies
Author never criticized anything. So, eliminate

B challenge a common perception of financiers
Infact author, via example in para 3, acknowledges risks associated with leverage buyouts.

C describe the evolution and application of a certain financial device
This, fits in with my paraphrasing of paras 1, 2 and 3.

D explain the popularity of leveraged buyouts during a certain period
Only a certain section of the RC does so not whole.

E argue that leveraged buyouts are detrimental to overall financial health
Author says that its risky not detrimental. So, ruled out.


The author mentions the RJR Nabisco case most probably in order to emphasize which of the following points?

A Many lending institutions are no longer willing to support leveraged buyouts.
Many lending institutions are no longer willing to support leveraged buyouts on assets of aquired companies.

B Leveraged buyouts can be successfully utilized to purchase large companies.
While leveraged buyouts can be utilized but not successfully.

C Leveraged buyouts are generally less successful in hostile takeovers than in non-hostile takeovers.
There is no comparison of success between hostile and non hostile take overs mentioned. So, eliminate.

D Leveraged buyouts contain major risks in addition to their benefits.
This is something the author touches in almost every para. So, correct.

E Kohlberg Kravis Roberts was a leader in the development of the leveraged buyout.
No where close to the text in RC.



The passage provides support for which of the following statements?

A Leveraged buyouts are utilized primarily by small companies.
No mention of size of buying companies discussed. However, size of bought companies is touched upon.

B Some companies purchased through leveraged buyouts fell short of their buyers' expectations.
There is a indirect mention of this through an example.

C Today, no banks or other lending institutions will finance leveraged buyouts.
Banks/Lending institutions will not finance based on purchased companies assets.

D Most leveraged buyouts bring significant financial rewards to the buyers.
Not strongly supported because passage does not talk about numbers.

E Leveraged buyouts were responsible for much of the economic growth of the 1980s.
It was popular but not sure whether it positively contributed to economy or not.
Please suggest.

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Pranay

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Post Tue Jul 21, 2015 5:06 am
prachi18oct wrote:
Marty Murray wrote:
Generally speaking people get tripped up by RC answer choices that they somehow feel are accurate representations or derivatives of what is said in the passage when actually they are not.

So one thing I am wondering is how careful you are about checking to see whether an answer choice really matches what is said in the passage.

For me to go much beyond that I would prefer to have some more information, such as the choices you chose when answering the questions you listed.
Exactly the case with me.
In the posted question I marked below answers :-

1) I eliminated A,B, E due to words "crticize,argue,challenge" as the author never intended to do so. I ruled out B as I thought the leverage buyout is a strategy and not a device. As I had read earlier, you need to justify every word in the correct option for it to be correct. Thats why I ruled out B. If the word "device" were not added, I would have chosen B as it is more close to what the passage intends.

Please tell me why it can be a device and how in future I can pick a correct strategy to eliminate the incorrect one?
The word device can be used in multiple ways, describing both tangible devices, such as a doorknob, and intangible devices, such as a leveraged buyout.

As far as any strategy for getting this one right goes, I guess you chose D, but D was not really right. So you were left with a dilemma. You liked B better but you didn't like the word device. What could you have done then? Well if D is not really a logical answer, then it is probably wrong. Also you could have noticed the the writer of the question used the expression "financial device" and realized that therefore maybe there is such a thing and considered that probably the question would not somehow be discussing something so totally unrelated to the passage as some tangible financial device, like what? maybe a safe deposit box?

Often on the GMAT, to make optimal decisions one has to weight subtle aspects of options and notice little things that point the way to the best choice. Also, on official questions anyway, usually the right answer is pretty tightly right. D was not clearly right. So really you did not have a solid reason to go with it. Maybe you just needed to consider this question for a few seconds longer.

Quote:
2)Here I eliminated A,E easily
The passage mentioned that "corporate giant RJR Nabisco was $25 billion" so it is a large company. So I keep this.
There is no talk about non-hostile takeovers or any comparison is mentioned to C is out.
Since the example is "most famous leveraged buyout" and the passage mentions "KKR ultimately succeeded by buying a controlling interest in RJR Nabisco" I found B more compelling over D.

Please suggest a way to remove such ambiguities between two answer choices.
In this case, you needed to look at little more closely at what was going on and at the context of the RJR Nabisco example. You looked at a the simple fact that the buyout itself was successful, but is this what the author was talking about in the passage? Not really. The author had described leverage buyouts as effective initially with drawbacks that tended to become apparent later. Then the author provided the RJR Nabisco example, and sure enough it was effective initially and then drawbacks showed up later as "By the mid-1990s, though, KKR had seen a reversal of fortune and was forced to sell off RJR Nabisco in order to relieve itself of the crushing debt load." A "crushing debt load" is not considered a sign of success.

The point here is that the author was making an example. Right? Does it really make sense that given everything else in the passage the author would have then jumped from discussing drawbacks and risks to providing an example of flawless success? That was not the case and you could have noticed that.

Remember the GMAT is a test of skills applicable to handling business school coursework. So simplistic rules and strategies are not sufficient for achieving a high score. You have to use vision and more sophisticated reasoning to get answers to the higher level questions.

Quote:
3) I eliminated A, D,E easily as they are not supported in the passage.
Between B and C, I agree C is strongly worded and I should have ruled it out based on my "justify-each-word-strategy". But B is not very clearly supported in the passage. As it a direct support question, I couldn't find direct support for it and thus eliminated.

Does the part "The drawbacks, however, became apparent only after the fact: the purchased company must perform extraordinarily well in order to generate the capital to pay off the loans that made the purchase possible in the first place. When the purchased company underperforms, the buyer must somehow find the money to pay off the loans. If such funds are not obtained, the buyer may be forced to sell off the company, or parts thereof, for less than the purchase price" hints at option B? I guesss Yes.
Is it similar to GMAT like RC and options?
Maybe that answer choice B is slightly weak and could be better supported, but you could have eliminated C for a couple of reasons. One is that this article discusses something that happened decades ago. So even if immediately after the times discussed no lending institutions would finance leveraged buyouts, they may have started doing so again by today. Further, as you basically said, that statement "Today, no banks or other lending institutions will finance leveraged buyouts." is rather strong. Yes the passage said that lending institutions had "turned away" from that type of lending, but that does not mean that there is not even one that will still do it.

So yes, B is better supported by what is said in the passage.

Regarding whether this passage and these questions are generally similar to what's on the actual GMAT, while the OA to question 3 may be slightly weak, maybe, I do find the passage and the questions, the answering of which requires going beyond using simple strategies to using more involved reasoning, to be a rather accurate representation of what's on the actual test.

One thing you have nailed here is your approach to getting more right answers. You are consistently asking the key question, "How could I have gotten this one right?"

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prachi18oct Master | Next Rank: 500 Posts
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Post Tue Jul 21, 2015 6:33 am
Thanks for the detailed analysis Marty!
I will try to implement your tips of more involved reasoning. Also I will now stick to official passages and explanations, although I exhausted most official ones before.

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Post Tue Jul 21, 2015 6:45 am
Sure thing.

It can be little challenging to find good non official RC questions, but still you can learn from many of the ones provided by certain companies.

For instance, most of the RC questions I have seen in the Veritas question bank are pretty good, and they definitely force one to really be careful.

Another option is LSAT official RC questions. While maybe their format is at times different from that of GMAT questions, since they are official, I am guessing that they are pretty tight.

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