Question

A group of analysts are reviewing the financial results of Airline A and Airline B. Both are​ medium-sized companies that operate domestic flights. Airline A has reported huge profits for the year compared to losses in the previous years. On the other​hand, Airline B reported losses mainly because of the costs associated with the servicing of its​ $3 billion debt. One of the analysts advocates investing in Airline A because of the reported numbers and the attractive valuation of it stock. Another analyst argues that Airline B is a better investment target as it could be possibly turned around.
Which of the​ following, if​ true, would weaken the argument that Airline A is a good candidate for​ investment?

A.

The bulk of Airline​ A's profits came from​ other income which included the sale of some of its fleet.

B.

In anticipation of increased​ demand, Airline A has set aside funds for buying medium sized jets for​ short-haul routes.

C.

A look at the stock price and the balance sheet of Airline A reveals that the​ company's stock is trading below its book value.

D.

Airline A plans to reduce flights to sectors where the traffic volume is low.

E.

The​ company's cost per passenger mile traveled is different from a typical cost per mile traveled in the commuter rail industry.

Answer 1

Answer:

A) The bulk of Airline​ A's profits came from​ other income which included the sale of some of its fleet.

Explanation:

Investment in favor of Airline A would severely be hindered if it is found out that the bulk of Airline​ A's profits came from​ other income which included the sale of some of its fleet.

This is because it would mean that Airline A is unable to keep up with its costs and thus is divesting its operations. Divesting is never a good sign for a firm looking to gain advantage in the future. Furthermore this explains why there was a sudden shift from loss making in the previous years to profits in the current year. A detailed inspection would be needed to eliminate uncertainty and as such any investment decisions in favor of airline A would not be justified.

Option B, C and D is efficient management and would make Airline A more lucrative for investment as it would mean management is eagerly looking to cut inefficient operations.

Option E would require more information to weaken the argument.

Hope that helps.