Certified Valuation Analyst (CVA) Practice Exam

What hurdle and debt rates are applied in Geri Co's valuation method?

1. 10.25%

2. 11.50%

3. 12.25%

4. 15.00%

The correct answer is: 12.25%

In the context of Geri Co's valuation method, identifying the correct hurdle and debt rates is crucial for an accurate valuation. The chosen rate of 12.25% typically reflects a weighted average cost of capital (WACC) that balances the cost of equity and debt financing, alongside the risk associated with Geri Co's operations and market position. The hurdle rate serves as the minimum acceptable return on an investment, ensuring that any project or investment undertaken will generate enough returns to justify the risk taken. A higher hurdle rate often indicates a higher risk profile associated with the business or industry in which Geri Co operates, further explaining the selection of this specific rate in their valuation method. It suggests that Geri Co's management is focused on ensuring substantial returns for stakeholders, aligning with best practices in financial management. Thus, selecting the 12.25% rate effectively captures both the expected return required by investors and the costs associated with borrowing, making it appropriate for Geri Co's valuation approach.