Question

Stock market analyst Dhirubhai Mehta: "We believe that company's stock will appreciate at $35\%$ the leader in its industry and we expect its sales to continue to grow at $8\%$ a year over this period.” Investor: "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 company's industry peer group is expected to experience stock appreciation rates of $30\%$ over the same time horizon.
• E. The company is expecting some losses in the coming season.

Answer 1

The correct option is B The company just won a patent on a new product.

Here the passage tells us that, the executive thinks the stock market will rice much higher than the actual sales rate of the company. To support this argument, the company must have reduced its expenses, making way for more profit or have other operations that will increase its income flow or capital holding. This is only given in option (a). Even though the company winning a patent is a good thing, it does not need to be translated in to profits as not all patens need to be commercialised. Hence the option still is (b).