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direstraits007
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CR: A new company can offer stocks in an initial public

by direstraits007 Fri Mar 27, 2009 6:32 pm

A new company can offer stocks in an initial public offering (IPO) before the company has proven itself capable of generating long-term profits for its stockholders. If the company seems likely to generate profits, the stock price in the IPO will rise; if the company seems less likely to generate profits, the stock price in the IPO will fall. Today business analysts announced that the Tenon Corporation has turned a profit in the financial quarter just completed. Therefore, stock prices for the Tenon Corporation's IPO, which is planned for next week, will rise.
Which of the following, if true, most weakens the argument above?

A) Companies that do not have profitable quarters are not profitable in the long run.
B) Stock price predictions for the Tenon Corporation's IPO have varied markedly over the last several months.
C) The last financial quarter has proven profitable for numerous other companies in addition to the Tenon Corporation.
D) Industry experts announced today that the raw materials from which the Tenon Corporation manufactures its products will become prohibitively expensive within the next month.
E) Most people who purchase stocks in an IPO decline to attend stockholders' meetings of the companies in which they own stock.

found this question in Princeton review tests.
OA: D

I think the answer should be B, and not D because in stimulus it is asked that "stock prices for the Tenon Corporation's IPO for next week will increase or not". But option D tells us about the next month. How can we assume that the next week will eventually be the next month only. So, the other probable best answer would be B.

Please correct me if I'm wrong.
Thanks!


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RonPurewal
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Re: CR: A new company can offer stocks in an initial public

by RonPurewal Wed Apr 08, 2009 5:47 am

(b) doesn't help at all, actually. it doesn't hurt, either ... but it doesn't help.
all it says is that stock prices HAVE varied markedly in recent months, but it gives no basis for any decision about which way those prices are going to go next.
there are two things very, very wrong with this choice: (1) it solely concerns the past, and so provides NO basis for an assertion about the future; and (2) it's a completely symmetric answer choice; it doesn't say anything at all about "up" or "down", just "varied".

i think i know what you're thinking: namely, that random fluctuations decrease the certainty with which these predictions can be made.
unfortunately (actually, fortunately, because that would be a really shady answer choice), that's not the way the test operates. instead, it's much more straightforward:

"WEAKEN" STATEMENTS WILL POINT IN THE DIRECTION OPPOSITE THE CONCLUSION.

i know this sounds like an obvious statement, but it immediately rules out (b). here's why:
the conclusion says that stock prices will rise.
therefore, a proper WEAKEN statement will point to evidence that stock prices will FALL.
evidence of fluctuation only, not actual falling, does not constitute this sort of evidence.

--

(d) is a very good answer choice. "prohibitive" is a very strong word - it implies that the company simply cannot afford the raw materials - so this is pretty clear evidence that the company won't be able to make a profit. according to the passage, that implies that stock prices will FALL, so this is the correct choice.