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Critical Reasoning Question (Discussion)

srao_ogirala said – Mon, 24 Nov 2008 06:21:22 -0000 ( Link )

Stock analyst: “We believe Company A’s stock will appreciate at 35% a year for the next 5 to 7 years. Company A just became the leader in its industry and we expect its sales to grow at 8% a year.” Commentator: “But how can the stock’s price be expected to grow more quickly than the company’s underlying sales?” Which of the following facts would best support the stock analyst?

a) The company’s expenses will be declining over the next 5 to 10 years. b)The company just won a patent on a new product. c)Company A’s stock is currently overvalued by a significant amount. d)The 5 to 7 year time frame is too long for anyone to accurately forecast. e)Company A’s industry peer group is expected to experience stock appreciation rates of 30% over the same time horizon.

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  1. basu said – Mon, 24 Nov 2008 14:54:01 -0000 ( Link )

    Company A’s industry peer group is expected to experience stock appreciation rates of 30% over the same time horizon.

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  2. Blues said – Mon, 24 Nov 2008 17:25:25 -0000 ( Link )

    I dont understand what this debate is about but answer is E…...?? kindly lemme know

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  3. oLahav said – Tue, 25 Nov 2008 15:06:54 -0000 ( Link )

    Hmm… I’m not so sure about this one. I think we can rule out A right away, since sales don’t affect stock prices. Answer D seems to make no sense, since if the forecast can’t be made accurately this would refute the prediction, not support it. Option C sounds wrong too- if the company’s stock is overvalued now, there’s nothing to support the idea that it will become more overvalued in the future for no reason. Thus A, C and D are out.

    That leaves B or E… But option B talks about a new patent, and shouldn’t this increase both sales and share prices by the same amount? So this doesn’t really support the idea. E on the other hand says that other companies are expected to have similarly high rises in stock price. But can we apply this directly to company A? I’m not entirely sure.

    I would guess E may be correct, by this reasoning, but I may be wrong here.

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  4. srao_ogirala said – Thu, 27 Nov 2008 08:41:21 -0000 ( Link )

    Ans : A…..... If the revenues increase and the expenses decrease, then the company can significantly increase its profits and be more likely to enjoy a high stock price appreciation rate.

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  5. oLahav said – Thu, 27 Nov 2008 15:26:19 -0000 ( Link )

    I’m not entirely sure I agree with this answer. Yes, lower expenses + high revenues = higher profits, but it’s not always true that higher profits = higher stock prices. Stock prices are affected by a lot of factors, including profits, company image and strategy, the economy in general, and a lot more. I still stand by my old reasoning, but if A is the official answer then I guess they’re ignoring this fact.

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  6. sandeeppandana said – Fri, 19 Dec 2008 18:14:16 -0000 ( Link )

    I agree the answer to be A.- If the expenses reduction can make the rise in stock value to be more than the sales. B- If they got patent on a product that doesn’t mean the product is going to perform in the market. It may fail. C- If the stock is overvalued by a significant amount then it weakens the arguement . D- This weakens the arguement since the time frame is long and we may not predict. E- If the peer group’s stocks appreciates then it doesn’t necessarily increase this company’s stocks. The peer companies may have taken measures and these may have causes the stock value to rise.

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