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New stores financed by investors have a much lower failure rate than stores financed by other means. Source of financing, therefore, must be a more important causative factor in the success of a new store than are such factors as the location of the store, the quality of the staff, or the choice of merchandise.
Q. Which of the following, if true, most seriously weakens the argument above?
  • a)
    Investors tend to be more responsive than others to changes in a new store’s financial needs.
  • b)
    The strategic planning of a new store is a less important factor in the long-term success of the business than are the personal characteristics of the owner.
  • c)
    More than half of all new stores close within three years.
  • d)
    The management of new stores is generally less formal than the management of ongoing stores.
  • e)
    Investors base their decisions to fund new stores on such factors as the personal characteristics of the owner, location of the store, and marketing goals.
Correct answer is option 'E'. Can you explain this answer?
Verified Answer
New stores financed by investors have a much lower failure rate than s...
The argument is that source of financing must be a more important causative factor in the success of a new store than other factors. Choice E suggests that it is not the source of financing that makes the difference, rather that investors are more likely to finance new stores in which the other factors - good locations, good quality of staff etc. - are good.
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A firms default risk, the measurement of the chances of the event in which the company will be unable to make the required payments on its debt obligations, reflects not only the likelihood that the firm will have bad luck but also the risk that the firms managerial decisions will lead the firm to default. Such management risk occurs because the impact of management on the firms value is uncertain, and this uncertainty affects the markets perception of a firms risk. Uncertainty about management is likely to be the highest when there is a new management team and should decrease over time as managements ability becomes known more precisely. In particular, when the new CEO is not considered an heir apparent prior to getting the position, or when he comes from outside of the company, or when the new CEO is younger, the market is expected to perceive relatively high uncertainty about the CEOs ability or future actions. Accordingly, it comes as no surprise that the CDS spread, a measure of a firms expected default risk, is about 35 basis points higher when a new CEO takes office than three years into his tenure. The CEO, however, is not the only member of the management team who is relevant for decision making in the firm. Chief Financial Officers (CFOs) have a large role in financial decision-making, so uncertainty about new CFOs could also affect the firms default risk and cost of borrowing.Now, a central feature of financial markets is that the interest rate a firm pays on debt increases with an increase in the markets perception of the firms risk. This risk occurs because of factors that affect the value of the firms underlying assets and because of uncertainty about how these assets will be managed. The literature on debt pricing typically does not distinguish between these types of underlying risks. However, all risks, including those generated by uncertainty about management, affect the likelihood of default. Consequently, a rational market should incorporate managerial-generated uncertainty into its assessment of a firms risk when pricing its securities. Also since uncertainty about management affects firms costs of borrowing and consequently their financial policies, the value of maintaining transparency in managerial policies and communicating them to the marketplace should be realised.Which of the following statements would the author most likely agree with?

A firms default risk, the measurement of the chances of the event in which the company will be unable to make the required payments on its debt obligations, reflects not only the likelihood that the firm will have bad luck but also the risk that the firms managerial decisions will lead the firm to default. Such management risk occurs because the impact of management on the firms value is uncertain, and this uncertainty affects the markets perception of a firms risk. Uncertainty about management is likely to be the highest when there is a new management team and should decrease over time as managements ability becomes known more precisely. In particular, when the new CEO is not considered an heir apparent prior to getting the position, or when he comes from outside of the company, or when the new CEO is younger, the market is expected to perceive relatively high uncertainty about the CEOs ability or future actions. Accordingly, it comes as no surprise that the CDS spread, a measure of a firms expected default risk, is about 35 basis points higher when a new CEO takes office than three years into his tenure. The CEO, however, is not the only member of the management team who is relevant for decision making in the firm. Chief Financial Officers (CFOs) have a large role in financial decision-making, so uncertainty about new CFOs could also affect the firms default risk and cost of borrowing.Now, a central feature of financial markets is that the interest rate a firm pays on debt increases with an increase in the markets perception of the firms risk. This risk occurs because of factors that affect the value of the firms underlying assets and because of uncertainty about how these assets will be managed. The literature on debt pricing typically does not distinguish between these types of underlying risks. However, all risks, including those generated by uncertainty about management, affect the likelihood of default. Consequently, a rational market should incorporate managerial-generated uncertainty into its assessment of a firms risk when pricing its securities. Also since uncertainty about management affects firms costs of borrowing and consequently their financial policies, the value of maintaining transparency in managerial policies and communicating them to the marketplace should be realised.Which of the following CANNOT be inferred from the passage?

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New stores financed by investors have a much lower failure rate than stores financed by other means. Source of financing, therefore, must be a more important causative factor in the success of a newstore than are such factors as the location of the store, the quality of the staff, or the choice of merchandise.Q. Which of the following, if true, most seriously weakens the argument above?a)Investors tend to be more responsive than others to changes in a new store’s financial needs.b)The strategic planning of a new store is a less important factor in the long-term success of the business than are the personal characteristics of the owner.c)More than half of all new stores close within three years.d)The management of new stores is generally less formal than the management of ongoing stores.e)Investors base their decisions to fund new stores on such factors as the personal characteristics of the owner, location of the store, and marketing goals.Correct answer is option 'E'. Can you explain this answer?
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New stores financed by investors have a much lower failure rate than stores financed by other means. Source of financing, therefore, must be a more important causative factor in the success of a newstore than are such factors as the location of the store, the quality of the staff, or the choice of merchandise.Q. Which of the following, if true, most seriously weakens the argument above?a)Investors tend to be more responsive than others to changes in a new store’s financial needs.b)The strategic planning of a new store is a less important factor in the long-term success of the business than are the personal characteristics of the owner.c)More than half of all new stores close within three years.d)The management of new stores is generally less formal than the management of ongoing stores.e)Investors base their decisions to fund new stores on such factors as the personal characteristics of the owner, location of the store, and marketing goals.Correct answer is option 'E'. Can you explain this answer? for GMAT 2024 is part of GMAT preparation. The Question and answers have been prepared according to the GMAT exam syllabus. Information about New stores financed by investors have a much lower failure rate than stores financed by other means. Source of financing, therefore, must be a more important causative factor in the success of a newstore than are such factors as the location of the store, the quality of the staff, or the choice of merchandise.Q. Which of the following, if true, most seriously weakens the argument above?a)Investors tend to be more responsive than others to changes in a new store’s financial needs.b)The strategic planning of a new store is a less important factor in the long-term success of the business than are the personal characteristics of the owner.c)More than half of all new stores close within three years.d)The management of new stores is generally less formal than the management of ongoing stores.e)Investors base their decisions to fund new stores on such factors as the personal characteristics of the owner, location of the store, and marketing goals.Correct answer is option 'E'. Can you explain this answer? covers all topics & solutions for GMAT 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for New stores financed by investors have a much lower failure rate than stores financed by other means. Source of financing, therefore, must be a more important causative factor in the success of a newstore than are such factors as the location of the store, the quality of the staff, or the choice of merchandise.Q. Which of the following, if true, most seriously weakens the argument above?a)Investors tend to be more responsive than others to changes in a new store’s financial needs.b)The strategic planning of a new store is a less important factor in the long-term success of the business than are the personal characteristics of the owner.c)More than half of all new stores close within three years.d)The management of new stores is generally less formal than the management of ongoing stores.e)Investors base their decisions to fund new stores on such factors as the personal characteristics of the owner, location of the store, and marketing goals.Correct answer is option 'E'. Can you explain this answer?.
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Which of the following, if true, most seriously weakens the argument above?a)Investors tend to be more responsive than others to changes in a new store’s financial needs.b)The strategic planning of a new store is a less important factor in the long-term success of the business than are the personal characteristics of the owner.c)More than half of all new stores close within three years.d)The management of new stores is generally less formal than the management of ongoing stores.e)Investors base their decisions to fund new stores on such factors as the personal characteristics of the owner, location of the store, and marketing goals.Correct answer is option 'E'. Can you explain this answer? defined & explained in the simplest way possible. Besides giving the explanation of New stores financed by investors have a much lower failure rate than stores financed by other means. Source of financing, therefore, must be a more important causative factor in the success of a newstore than are such factors as the location of the store, the quality of the staff, or the choice of merchandise.Q. Which of the following, if true, most seriously weakens the argument above?a)Investors tend to be more responsive than others to changes in a new store’s financial needs.b)The strategic planning of a new store is a less important factor in the long-term success of the business than are the personal characteristics of the owner.c)More than half of all new stores close within three years.d)The management of new stores is generally less formal than the management of ongoing stores.e)Investors base their decisions to fund new stores on such factors as the personal characteristics of the owner, location of the store, and marketing goals.Correct answer is option 'E'. 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Which of the following, if true, most seriously weakens the argument above?a)Investors tend to be more responsive than others to changes in a new store’s financial needs.b)The strategic planning of a new store is a less important factor in the long-term success of the business than are the personal characteristics of the owner.c)More than half of all new stores close within three years.d)The management of new stores is generally less formal than the management of ongoing stores.e)Investors base their decisions to fund new stores on such factors as the personal characteristics of the owner, location of the store, and marketing goals.Correct answer is option 'E'. Can you explain this answer? has been provided alongside types of New stores financed by investors have a much lower failure rate than stores financed by other means. Source of financing, therefore, must be a more important causative factor in the success of a newstore than are such factors as the location of the store, the quality of the staff, or the choice of merchandise.Q. Which of the following, if true, most seriously weakens the argument above?a)Investors tend to be more responsive than others to changes in a new store’s financial needs.b)The strategic planning of a new store is a less important factor in the long-term success of the business than are the personal characteristics of the owner.c)More than half of all new stores close within three years.d)The management of new stores is generally less formal than the management of ongoing stores.e)Investors base their decisions to fund new stores on such factors as the personal characteristics of the owner, location of the store, and marketing goals.Correct answer is option 'E'. 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Which of the following, if true, most seriously weakens the argument above?a)Investors tend to be more responsive than others to changes in a new store’s financial needs.b)The strategic planning of a new store is a less important factor in the long-term success of the business than are the personal characteristics of the owner.c)More than half of all new stores close within three years.d)The management of new stores is generally less formal than the management of ongoing stores.e)Investors base their decisions to fund new stores on such factors as the personal characteristics of the owner, location of the store, and marketing goals.Correct answer is option 'E'. Can you explain this answer? tests, examples and also practice GMAT tests.
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