In the early to mid-1980s, a business practice - MGMAT RC

[nickkrym]

The primary purpose of the passage is to:

fight is between
(c)describe the evolution and application of a certain financial device &
(d)explain the popularity of leveraged buyouts during a certain period


MGMAT test review says C. I disagree.
D is more convincing b'cos the passage is about certain specific period "early to mid 80s" and in last para they say "The 1980s were the heyday of the leveraged buyout" I would call that popular.

whereas for C, wouldn't evolution pertain to what it was and what it it is now...evolution is about change; in this case it should have been change in the that financial device. Do we see any such change mentioned in the passage? Anything saying how it was practiced in past and how it is practiced now?

Please help.

[StaceyKoprince]

Please read (and follow!) the forum guidelines before posting. The text of the question (including answers) needs to be reproduced in full. Because this is an RC passage, the relevant text of the RC passage also needs to be reproduced (you can copy and paste).

If you post the full text, we will be happy to answer!

[anoop.rawat.113313173]

Here is the entire RC passage:
In the early to mid-1980s, a business practice known as a "leveraged buyout" became popular as a method for companies to expand without having to spend any of their own assets. The leveraged buyout was not without its problems, however, and in time it came to represent in the public imagination not only corporate ingenuity and success, but also excess and greed. Many of the main corporate figures of the 1980s saw spectacular rises and, perhaps inevitably, spectacular falls as they abused the leveraged buyout as a means to extraordinary financial gain.
A leveraged buyout entails one company purchasing another using the assets of the purchased company as the collateral to secure the funds needed to buy that company. The leveraged buyout allows companies to take on debt that their own assets would have been insufficient to secure in order to finance expansion. The benefit of the leveraged buyout is obvious: companies with insufficient funds can still expand to compete with larger competitors. The drawbacks, however, became apparent only after the fact: the purchased company must perform extraordinarily well in order to generate the capital to pay off the loans that made the purchase possible in the first place. When the purchased company underperforms, the buyer must somehow find the money to pay off the loans. If such funds are not obtained, the buyer may be forced to sell off the company, or parts thereof, for less than the purchase price. In these cases, the buyer is still responsible for repaying the debt that is not covered by the sale price. Many of these deals resulted in the evisceration of the purchased companies, as subparts were sold to pay down the loans and employees were laid off to reduce costs and increase profits.
The most famous leveraged buyout is probably the 1988 purchase of RJR Nabisco by Kohlberg Kravis Roberts ("KKR"). The purchase price for the corporate giant RJR Nabisco was $25 billion, almost all of which was borrowed money. The takeover was "hostile," meaning that RJR Nabisco resisted any overtures from potential buyers. KKR ultimately succeeded by buying a controlling interest in RJR Nabisco, thereby obtaining voting control over the company. By the mid-1990s, though, KKR had seen a reversal of fortune and was forced to sell off RJR Nabisco in order to relieve itself of the crushing debt load.
The 1980s were the heyday of the leveraged buyout, as lending institutions were willing to loan money for these ventures. When the deals turned out to be much riskier in life than on paper, the lenders turned away from the buyouts and returned to the notion that borrowers must possess adequate collateral of their own.


(Question)

The primary purpose of the passage is to
A. criticize the motives of those who use risky financial strategies
B. challenge a common perception of financiers
C. describe the evolution and application of a certain financial device
D. explain the popularity of leveraged buyouts during a certain period
E. argue that leveraged buyouts are detrimental to overall financial health

The OA is (C).
I have the same issue as the original post. Why is (D) not correct?
Seems like "evolution" is not really discussed in the passage. So, why is (C) correct.

Thanks.

[ChrisB]

Hi,

I can understand your frustration because this is a really tough problem, and the presence of an answer choice such as D makes it even tougher!

Answer choice D takes the proper tone because it is neutral as signified by the use of the word explain. Furthermore, the first sentence of the passage does mention that the leveraged buyout became popular in the early to mid-1980's. The passage as a whole, however, does not explain why the leveraged buyout was popular. In fact, paragraphs 2 & 3 do not at all discuss the popularity of the leveraged buyout but do explain how the leveraged buyout was applied and how its use peaked with the RJR deal before plummeting due to shortcomings in the financial device. The passage as a whole thus describes how the use of the leveraged buyout evolved over time in the 1980's.

Answer choice C is correct because the passage describes how the leverage buyout was applied in paragraphs 2 & 3. Furthermore, the entire passage describes how the leveraged buyout saw its popularity rise in the 1980's and peak with the RJR deal before plummeting in popularity according to the final passage.

"Evolution" in answer choice C refers to the rise and fall in popularity of the leveraged buyout and not necessarily to the progression of the leveraged buyout from its emergence to the present day. Though less common, this use of the term evolution is still correct.

This is truly a very tough question that provides valuable lessons on how to attack tough purpose questions in the future. Remember to consider the passage as a whole and you'll be in better shape going forward.

Thanks,
Chris

[as2764]

In fact, paragraphs 2 & 3 do not at all discuss the popularity of the leveraged buyout but do explain how the leveraged buyout was applied and how its use peaked with the RJR deal before plummeting due to shortcomings in the financial device. The passage as a whole thus describes how the use of the leveraged buyout evolved over time in the 1980's.

Answer choice C is correct because the passage describes how the leverage buyout was applied in paragraphs 2 & 3. Furthermore, the entire passage describes how the leveraged buyout saw its popularity rise in the 1980's and peak with the RJR deal before plummeting in popularity according to the final passage.

"Evolution" in answer choice C refers to the rise and fall in popularity of the leveraged buyout and not necessarily to the progression of the leveraged buyout from its emergence to the present day. Though less common, this use of the term evolution is still correct.

hi Chris -- reading your explanation makes me think that you're stressing on the popularity of the financial device. also, i think the phrase explain the popularity in choice D is very deceiving. it appears easier to differentiate ans choices when read as:
i. explain the reasons for popularity...
ii. explain the rise and fall in popularity...

overall, the passage seems to say negative things or disadvantages of LBO, leading to its unpopularity. it is NOT until the last paragraph when the evolution is actually talked about. even the 2nd passage that you mention as an application, is in fact an explanation of LBO, its advantages, and primarily its disadvantages -- explaining an eventual fall in popularity:
Many of these deals resulted in the evisceration of the purchased companies...

i still think D is better. can you please explain in another way?

[jnelson0612]

Let me take a shot here. My problem with "explain the popularity" is that this is only done in the first part of the second paragraph, in which the advantages of the leveraged buyout are discussed. When I look at the rest of the passage, reasons for the popularity of the LBO don't really exist.

[as2764]

Let me take a shot here. My problem with "explain the popularity" is that this is only done in the first part of the second paragraph, in which the advantages of the leveraged buyout are discussed. When I look at the rest of the passage, reasons for the popularity of the LBO don't really exist.

the popularity is talked about in the 1st para (a business practice known as a "leveraged buyout" became popular) as well, along with the 2nd para, and the 3rd para illustrates the use(application), resulting from popularity.

you mentioned "reasons for popularity", so does "explain the popularity" mean "explain the reasons for popularity" as i stated in my post above? plainly put, the passage is talking about the use of a financial device during a certain period and that it had some problems.

a better main idea could've been, "describe the practice of a problematic financial device during a certain era", but given what we have, C is even worse. C says 'evolution'. there is NO evolution except for in the end para, most of it is application. i don't want to be splitting hairs, but
"describe the application and evolution of a certain financial device" appears better than
"describe the evolution and application of a certain financial device"
due to the passage's emphasis on application. because the passage is pretty much about how the thing was practiced!

appreciate your thoughts.

[jnelson0612]

Let me take a shot here. My problem with "explain the popularity" is that this is only done in the first part of the second paragraph, in which the advantages of the leveraged buyout are discussed. When I look at the rest of the passage, reasons for the popularity of the LBO don't really exist.

the popularity is talked about in the 1st para (a business practice known as a "leveraged buyout" became popular) as well, along with the 2nd para, and the 3rd para illustrates the use(application), resulting from popularity.

you mentioned "reasons for popularity", so does "explain the popularity" mean "explain the reasons for popularity" as i stated in my post above? plainly put, the passage is talking about the use of a financial device during a certain period and that it had some problems.

a better main idea could've been, "describe the practice of a problematic financial device during a certain era", but given what we have, C is even worse. C says 'evolution'. there is NO evolution except for in the end para, most of it is application. i don't want to be splitting hairs, but
"describe the application and evolution of a certain financial device" appears better than
"describe the evolution and application of a certain financial device"
due to the passage's emphasis on application. because the passage is pretty much about how the thing was practiced!

appreciate your thoughts.

Hmm. I can live with your points on paragraphs 1 and 2, but an example by itself does not necessarily indicate popularity. I think you may be going a step too far here.

My beef with that answer choice is "explaining the popularity"--in this case, I'd want to see each paragraph discussing a feature of the LBO that caused its popularity. I just don't see enough of that here. I'm not going to argue that the stated correct answer choice isn't a fabulous match (because in my opinion it is not) and I do like your stated main idea much better.

[as2764]

My beef with that answer choice is "explaining the popularity"--in this case, I'd want to see each paragraph discussing a feature of the LBO that caused its popularity. I just don't see enough of that here. I'm not going to argue that the stated correct answer choice isn't a fabulous match (because in my opinion it is not) and I do like your stated main idea much better.

the discussion's pretty convoluted, Jamie. i'm switching to the GMAT prep forum threads :-)

thanks

[tim]

good luck..

[sidd.shah123]

Why iS E wrong?

E. argue that leveraged buyouts are detrimental to overall financial health


The passage mostly deals with shortcomings of leveraged buyout ...

[jnelson0612]

Why iS E wrong?

E. argue that leveraged buyouts are detrimental to overall financial health

The passage mostly deals with shortcomings of leveraged buyout ...

I would ask you to consider if the passage does more "describing" of the LBOs or more "arguing" that they are detrimental to overall financial health (remember, in RC every word must be right or the answer is wrong).

[060504]

Hi all,

Same passage, different question:

The author mentions the RJR Nabisco case most probably in order to emphasize which of the following points?

A) Many lending institutions are no longer willing to support leveraged buyouts.

B) Leveraged buyouts can be successfully utilized to purchase large companies.

C) Leveraged buyouts are generally less successful in hostile takeovers than in non-hostile takeovers.

D) Leveraged buyouts contain major risks in addition to their benefits.

E) Kohlberg Kravis Roberts was a leader in the development of the leveraged buyout.

OA is D. However, I thought B was just as appropriate. This is the explanation for why B is incorrect.

"(B) This may be true (and presumably some companies did use LBOs successfully), but the RJR Nabisco case is an example of a failed LBO, not a successful one. "

My problem with that the RJR Nabisco case DID show that LBO can be used successfully. The answer (B) does not promise anything else but LBO's being (successfully) used to purchase large companies. Technically, the RJR Nabisco case IS a successful LBO, in that 1) the buyout was completed and 2) the capital used for the purchase was sufficiently leveraged. The explanation seems to read into (B) as if it said "Leveraged buyouts of large companies can be a successful investment in the long term." How can the answer say "successfully utilized" as if it was a "successful investment"? Please advise.

[jnelson0612]

I see your point, but let's focus in on the question. It asks why did the author include the RJR case in this discussion? What point is the author trying to emphasize through including the RJR case?

The purpose of the passage is to describe how the LBO became popular but had some real pitfalls. From the first paragraph:
The leveraged buyout was not without its problems, however, and in time it came to represent in the public imagination not only corporate ingenuity and success, but also excess and greed. Many of the main corporate figures of the 1980s saw spectacular rises and, perhaps inevitably, spectacular falls as they abused the leveraged buyout as a means to extraordinary financial gain.

From the paragraph about RJR:
By the mid-1990s, though, KKR had seen a reversal of fortune and was forced to sell off RJR Nabisco in order to relieve itself of the crushing debt load.

So we have to ask, did the author mention RJR merely to give an example of a successful LBO? Or did the author mention it to illustrate his overall point: that LBO's contained major risks in addition to benefits. We really have to focus on the author's purpose in including this example. The best answer matching this is D.

Hope this helps! :-)

[shankhdhar.gaurav]

I am with Ashish on "Main Point" Q of this passage. This Q shows that why one must focus as mush as possible on Official Q's.

I am not convinced by the explanation here and also at the BTG Forum:
http://www.beatthegmat.com/mgmat-rc-lev ... tml#496038

My Summary of the passage:
Para 1: Popularity of leveraged buyouts in 80s and its negative aspects
Para 2: Details about "How leveraged buyouts work in practice" and its limitations in detail
Para 3: Example of a failed leveraged buyouts
Para 4: Again talk about leveraged buyouts in 80s that 80s were good for leveraged buyouts and that reasons why it faded into oblivion

So i don't understand why the correct answer is "describe the evolution and application of a certain financial device". The passage talk about only 80s. Only place where passage talks about 90s is in the example paragraph. All the instructor (even MGMAT's own Ron in his August 19, 2010:
Reading Comprehension: Long Passages & Main Idea Questions session said the same) says that don't go for example and content/facts related data while solving Main Point Q.

So i am not convinced why choice D "explain the popularity of leveraged buyouts during a certain period" is wrong?