QUESTION: 105 Exam Topic: 2, Volume B

Analysts will use the capital asset pricing model (CAPM) to determine the cost of equity for the Maxim health plan, a for-profit plan. According to the CAPM, Maxim's cost of equity is equal to

The average interest rate that Maxim is paying to debt holders, adjusted for a tax shield
Maxim's risk-free rate minus its beta
Maxim's risk-free rate plus an adjustment that considers the market rate, at a given level of systematic (non diversifiable) risk
Maxim's risk-free rate plus an adjustment that considers the market rate, at a given level of nonsystematic (diversifiable) risk

Answer(s): C

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QUESTION: 106 Exam Topic: 2, Volume B

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

Both A and B
A only
B only
Neither A nor B

Answer(s): B

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QUESTION: 107 Exam Topic: 2, Volume B

The core of a health plan's strategic financial plan is the development of its pro forma financial statements. The following statements are about these pro forma financial statements. Select the answer choice containing the correct statement.

A health plan's pro forma financial statements forecast what the plan's financial condition will be at the end of an accounting period, without regard to whether the health plan achieves its objectives.
Forecasting the balance sheet is more critical to the health plan than forecasting either the cash flow statement or the income statement, because the balance sheet drives the development of the other two statements.
In order to avoid allowing the desired financial results to drive the assumptions used in developing the pro forma income statement, a health plan should avoid linking these assumptions to the health plan's overall strategic plan.
A health plan can use its pro forma cash flow statement to calculate the net present value of the health plan's strategic plan.

Answer(s): D

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QUESTION: 108 Exam Topic: 2, Volume B

The Savanna health plan used a risk analysis technique which defines the key assumptions of Savanna's strategic financial plan in terms of mathematical formulas that can be correlated to each other or analyzed independently. This technique allowed Savanna to simulate probable future events on a computer and produce a distribution of possible outcomes. This risk analysis technique, which can be used to predict Savanna's distribution of expected claims, is known as

A hurdle rate simulation
Optimistic, most likely, pessimistic scenario modeling
A Monte Carlo simulation
Debt covenant modeling

Answer(s): C

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QUESTION: 105 Exam Topic: 2, Volume B

QUESTION: 106 Exam Topic: 2, Volume B

QUESTION: 107 Exam Topic: 2, Volume B

QUESTION: 108 Exam Topic: 2, Volume B