AHIP AHM-520 Exam - Topic 6 Question 83 Discussion

Actual exam question for AHIP's AHM-520 exam

Question #: 83
Topic #: 6

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

ABoth A and B

BA only

CB only

DNeither A nor B

Show Suggested Answer

Suggested Answer: B

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

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Sherell

8 months ago

I thought WACC should be higher than the cost of equity!

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Alyce

8 months ago

Nuevo's WACC is indeed 10.2%.

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Wilda

9 months ago

Wait, how can B be true? That sounds off.

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Stanton

9 months ago

Totally agree, A is correct!

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Naomi

9 months ago

WACC is calculated using the formula, right?

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Nakisha

9 months 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.

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Nina

10 months 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?

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Susana

10 months ago

I'm a bit confused about B. I thought investments should earn more than the WACC to add value, not less.

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Jannette

10 months ago

I think I remember calculating WACC in practice questions, and I got around 10.2% too, so A might be correct.

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Jackie

10 months 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.

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Jame

10 months 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.

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Kenny

10 months 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?

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Dominga

10 months 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.

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German

10 months 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.

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Dierdre

10 months 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.

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Therese

10 months ago

Radio buttons for sure. That's the classic way to present a set of mutually exclusive options to the user.

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Tommy

10 months ago

Alright, let me go through the steps in my head and see which one doesn't fit. I've got this!

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Delmy

10 months ago

Workers' compensation used to come up in our practice questions, but I feel like Medicaid is the bigger focus here.

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Velda

10 months ago

I'm a bit unsure about the right options here. I think randomness might be important, but rotation sounds familiar too.

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Felix

10 months 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.

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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.

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Emilio

1 year ago

Exactly, it's all about balancing debt and equity in the capital structure

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Sarina

1 year ago

That makes sense, investments should earn more than WACC to add value

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Lenita

1 year ago

I agree, Nuevo's WACC is 10.2%

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Bev

1 year ago

I think the answer is A) Both A and B

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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?

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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.

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William

1 year ago

I'm with you guys, D) Neither A nor B it is. Let's hope for the best!

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Loreta

1 year ago

Yeah, I agree. Let's stick with D) Neither A nor B and see how it goes.

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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.

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Sabrina

1 year 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 year ago

Exactly, that's why the answer is C) B only.

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Carin

1 year ago

Yeah, it's all about making sure the investment earns more than the WACC.

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Aleta

1 year ago

I think you're right, focusing on the investment hurdle rate is key.

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Annmarie

1 year 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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Lennie

1 year ago

Hmm, I see your point. So, both A and B could be the correct answer then.

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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.

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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.

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Talia

1 year 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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