Certified Valuation Analyst (CVA) Practice Exam

What is the cap rate applicable to Geri Co?

1. 20% pretax

2. 25% pretax

3. 30% pretax

4. 15% pretax

The correct answer is: 25% pretax

The capitalization rate, or cap rate, represents the expected rate of return on an investment property and is typically calculated as the ratio of net operating income (NOI) to property asset value. In the context of Geri Co, the cap rate of 25% pretax indicates a solid expected return on investment, showing that for every dollar of investment, Geri Co anticipates generating 25 cents in pretax income. This cap rate reflects the perceived risk associated with the property: a higher cap rate often corresponds to a higher risk, while a lower cap rate usually suggests lower risk. In this situation, a 25% pretax cap rate suggests a balance between attractiveness as an investment opportunity and the underlying risks involved. Understanding the appropriate cap rate is crucial for effective property valuation and investment decision-making. It also serves as a comparative metric against-market benchmarks and other investment opportunities, thus aiding in strategic financial planning and performance assessment for Geri Co.