Question

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.

Answer 1

Answer: 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.

Step-by-step explanation:

Costs eat into the profits of a company because the higher the costs of producing something, the less profit can be made after the costs are covered.

If there is a situation therefore, where the raw materials that Tenton relies on becomes more expensive, it is definitely going to affect their profitability because they will incur a higher cost to produce.

This will reduce their future profitability which would mean that Tenton becomes less likely to generate a certain level of profit in future thereby weakening their stock according to the logic above.