Q2 - Acme's bank loan must be immediately

[mshinners]

Question Type:
Necessary Assumption

Stimulus Breakdown:
Earnings below $1m → Immediately repay → Bankrupt
Acme has been reporting over $1m in revenue, but it now admits it overstated that. So, the author says, time to sell your stock in Acme (i.e., they'll be declaring bankruptcy).

Answer Anticipation:
If their earnings fall below $1m, they have to declare bankruptcy. The author states that they overstated earnings, but that doesn’t necessarily get us below $1m. We need to find an answer saying that the overestimate was large enough that their earnings actually dipped below $1m.

Correct Answer:
(A)

Answer Choice Analysis:
(A) Bingo. This answer gives us the trigger of the conditional chain (it's also sufficient, by the by).

(B) Out of scope. We care about their earnings and this bank loan, not others. Earnings also don't care about debt.

(C) Irrelevant. A single instance of falling below $1m is enough to trigger the bankruptcy, so it doesn't matter if there are other bad years.

(D) It's a trap! This sounds good, as it states they won't hit their target. However, this isn't even sufficient! Since it's looking into the future, it doesn't take into account the possibility that they pay off the loan by the end of the year. To address the specific question here, it's not necessary because they don't have to run into the trigger this year to get to the conclusion; they could fall below $1m next year, or last year, and still have to declare bankruptcy.

(E) Out of scope. While this would be nice for Acme, they do have the bank loan, so this answer choice doesn't apply to the situation at hand.

Takeaway/Pattern: While conditional logic is rare in Necessary Assumption questions, it does show up. Generally, they'll give you a statement that features a term shift/detail creep from the triggering term, and the correct answer will connect the shifted statement to the actual trigger. This is also true of Sufficient Assumption questions.

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