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AHIP Exam AHM-520 Topic 6 Question 83 Discussion

Actual exam question for AHIP's AHM-520 exam
Question #: 83
Topic #: 6
[All AHM-520 Questions]

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

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Suggested Answer: B

by Earleen at Mar 20, 2024, 04:23 PM

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Rory
16 days 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.
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Fabiola
20 days 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?
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Luann
24 days 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.
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Janine
1 days ago
I think you're right, this is more finance than math. I'll go with D) Neither A nor B as well.
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Sabrina
1 months 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?
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Sabra
1 days ago
Exactly, that's why the answer is C) B only.
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Carin
7 days ago
Yeah, it's all about making sure the investment earns more than the WACC.
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Aleta
19 days ago
I think you're right, focusing on the investment hurdle rate is key.
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Annmarie
1 months 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?
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Rex
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.
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Arlene
21 days ago
I think you're right. If Nuevo's WACC is 10.2%, then any investment earning less than that would not add value.
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Talia
1 months 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.
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Buck
13 days ago
So, do you think the correct statement is A) Both A and B?
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Delmy
22 days ago
I agree, Nuevo's WACC can be calculated using the given information.
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Eve
2 months 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.
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Peggie
2 months ago
I agree with Tesha. Nuevo's WACC is a combination of debt and equity, so it makes sense that both statements are correct.
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Tesha
2 months ago
I think the correct answer is A) Both A and B.
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