AHIP Exam AHM-520 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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Rory

1 months 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

3 days ago

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

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Sarina

4 days ago

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

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Lenita

5 days ago

I agree, Nuevo's WACC is 10.2%

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Bev

14 days ago

I think the answer is A) Both A and B

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Fabiola

1 months 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 months 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

17 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

2 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

17 days ago

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

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Carin

23 days ago

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

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Aleta

1 months ago

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

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Annmarie

2 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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Lennie

15 days ago

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

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Rex

16 days 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 months 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

2 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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