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The Nuevo health plan's capital structure consists of 30% debt and 70% equity. Nuevo's average after-tax cost of debt is 6% and its cost of equity is 12%. The following statement(s) can correctly be made about Nuevo's weighted average cost of capital (WACC):
A) Nuevo has a WACC of 10.2%
B) If Nuevo establishes its WACC as the handle rate for capital investments, then it can expect an investment to add value to the health plan only if the investment is expected to earn a return of less than Nuevo's WACC
Suggested Answer: B
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46 comments · newest first
SH
Sherell
11 months ago
I thought WACC should be higher than the cost of equity!
AL
Alyce
11 months ago
Nuevo's WACC is indeed 10.2%.
WI
Wilda
12 months ago
Wait, how can B be true? That sounds off.
ST
Stanton
12 months ago
Totally agree, A is correct!
NA
Naomi
1 year ago
WACC is calculated using the formula, right?
NA
Nakisha
1 year ago
I’m not sure about the exact WACC calculation, but I agree that investments should exceed WACC to be worthwhile, so I lean towards D.
NI
Nina
1 year ago
I feel like I've seen a similar question before, and it was definitely about comparing returns to WACC, so maybe C is the right choice?
SU
Susana
1 year ago
I'm a bit confused about B. I thought investments should earn more than the WACC to add value, not less.
JA
Jannette
1 year ago
I think I remember calculating WACC in practice questions, and I got around 10.2% too, so A might be correct.
JA
Jackie
1 year ago
I'm feeling pretty confident about this one. I'll work through the WACC calculation step-by-step and then evaluate the investment decision criteria based on that result.
JA
Jame
1 year ago
This is straightforward. The WACC is 10.2%, and if Nuevo uses that as the hurdle rate, then any investment earning less than 10.2% would not add value.
KE
Kenny
1 year ago
I'm a bit confused on how to approach this. Should I focus on just calculating the WACC or also consider the investment decision criteria?
DO
Dominga
1 year ago
Okay, I think I've got this. The key is calculating the WACC based on the given debt and equity percentages, as well as the after-tax cost of debt and cost of equity.
GE
German
1 year ago
Hmm, this looks like a tricky one. I'll need to carefully work through the capital structure and cost of capital components to determine the WACC.
DI
Dierdre
1 year ago
I'm pretty confident the answer is B. Executive management setting the tone and backing the policy is crucial for employee acceptance. The other options are all important, but executive support is the most critical factor.
TH
Therese
1 year ago
Radio buttons for sure. That's the classic way to present a set of mutually exclusive options to the user.
TO
Tommy
1 year ago
Alright, let me go through the steps in my head and see which one doesn't fit. I've got this!
DE
Delmy
1 year ago
Workers' compensation used to come up in our practice questions, but I feel like Medicaid is the bigger focus here.
VE
Velda
1 year ago
I'm a bit unsure about the right options here. I think randomness might be important, but rotation sounds familiar too.
FE
Felix
1 year ago
Whoa, this is a serious situation. I better not jump to conclusions. I'll go with option D and inform the computer security incident response team to look into this.
RO
Rory
1 year ago
Seriously, why do they always make these finance questions so 'equity'? I'm just going to 'debt'cide on the answer and hope for the best.
EM
Emilio
1 year ago
Exactly, it's all about balancing debt and equity in the capital structure
SA
Sarina
1 year ago
That makes sense, investments should earn more than WACC to add value
LE
Lenita
1 year ago
I agree, Nuevo's WACC is 10.2%
BE
Bev
1 year ago
I think the answer is A) Both A and B
FA
Fabiola
1 year ago
I bet the answer is 'All of the above, plus a free ice cream sundae for the person who can come up with the most creative solution.' That's how these finance exams always work, right?
LU
Luann
1 year ago
Wait, are we supposed to be doing math here? I thought this was a finance exam, not a calculus test. I'll just go with D) Neither A nor B and hope for the best.
WI
William
1 year ago
I'm with you guys, D) Neither A nor B it is. Let's hope for the best!
LO
Loreta
1 year ago
Yeah, I agree. Let's stick with D) Neither A nor B and see how it goes.
JA
Janine
1 year ago
I think you're right, this is more finance than math. I'll go with D) Neither A nor B as well.
SA
Sabrina
2 years ago
Haha, this question is a piece of cake! The answer is clearly C) B only. I mean, who cares about the actual WACC calculation when you can just focus on the investment hurdle rate?
SA
Sabra
1 year ago
Exactly, that's why the answer is C) B only.
CA
Carin
1 year ago
Yeah, it's all about making sure the investment earns more than the WACC.
AL
Aleta
1 year ago
I think you're right, focusing on the investment hurdle rate is key.
AN
Annmarie
2 years ago
Hmm, I'm not so sure. Wouldn't B) A only be the correct answer? I mean, if Nuevo's WACC is 10.2%, then any investment earning less than that would not add value, right?
LE
Lennie
1 year ago
Hmm, I see your point. So, both A and B could be the correct answer then.
RE
Rex
1 year ago
But doesn't that mean both A and B are correct? Nuevo's WACC is 10.2%, so any investment earning less than that would not add value.
AR
Arlene
1 year ago
I think you're right. If Nuevo's WACC is 10.2%, then any investment earning less than that would not add value.
TA
Talia
2 years ago
I think the answer is A) Both A and B. Nuevo's WACC can be calculated using the given capital structure and costs of debt and equity, and this WACC should be used as the hurdle rate for capital investments.
CA
Cassandra
1 year ago
Great, thanks for clarifying!
AL
Alease
1 year ago
Yes, that's correct. Nuevo's WACC is 10.2% and it should be used as the hurdle rate for investments.
BU
Buck
1 year ago
So, do you think the correct statement is A) Both A and B?
DE
Delmy
1 year ago
I agree, Nuevo's WACC can be calculated using the given information.
EV
Eve
2 years ago
I'm not sure about that. I think the answer might be C) B only because the WACC is the minimum return an investment should generate.
PE
Peggie
2 years ago
I agree with Tesha. Nuevo's WACC is a combination of debt and equity, so it makes sense that both statements are correct.
TE
Tesha
2 years ago
I think the correct answer is A) Both A and B.