Session 02 · Capital Structure
The Hurdle Rate
Capital allocation decision exercise
Board room — five minutes to decide
“The proposed acquisition clears our hurdle rate at 8.2% — above our firm WACC of 7.8%. The deal should proceed.”
Your CFO has just briefed the board. The rate used is above firm WACC — so the CFO has applied a risk premium. The lead banker is in the room. You have five minutes to decide whether that premium is adequate for the risk before you agree with the recommendation.
What this exercise tests
Recognising that a hurdle rate above firm WACC is not automatically adequate — the size of the premium has to match the actual risk.
Understanding that firm-level WACC systematically misprices investments with different geographic or operational risk profiles.
Knowing what to ask — and when to push back — before the board commits.