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Does a bakery chain earn its cost of capital?

You run the case. Read the prompt, answer questions from the notes below, and share data only when the candidate asks for it or gets stuck. Score at the end.

Case timer

00:00

Target length:

1. Read the prompt aloud

Read it slowly, then pause. Let the candidate ask questions before they structure.

Illustrative numbers. A bakery chain in Spain has EUR 10 million invested in its shops, ovens and stock. Its operating profit (EBIT) is EUR 2 million a year and the tax rate is 25 percent. It is funded 40 percent by bank loans at 6 percent interest. The other 60 percent comes from owners, who expect 12 percent a year for the risk. Interest is tax deductible. Does the chain create value, and how much a year?

2. Answers to clarifying questions

This case has no scripted clarifying answers. Answer from the prompt, and say "assume what you think is reasonable" if the prompt does not cover it.

3. A model structure

Compare the candidate's structure with this one. A different split can be just as good if it is clean and fits the problem.

Economic profit = (ROIC minus WACC) x invested capital
- ROIC = NOPAT / invested capital
  - NOPAT = EBIT x (1 minus tax rate)
- WACC = debt share x after-tax cost of debt + equity share x cost of equity

4. The working, step by step

Each step shows how a strong candidate works it out. Share a new fact from it only when the candidate asks or is stuck, and let them do the math: the result in the dark box is what they should reach.

Step 1: NOPAT
What a strong candidate does: Operating profit of EUR 2 million, keep 75 percent after tax.
NOPAT (EUR millions): 2 × (1 - 0.25) = 1.5
Step 2: ROIC
What a strong candidate does: NOPAT divided by the EUR 10 million invested.
ROIC (percent): 1.5 ÷ 10 × 100 = 15
Step 3: After-tax cost of debt
What a strong candidate does: Interest cuts the tax bill, so a 6 percent loan really costs 6 percent times 0.75.
After-tax cost of debt (percent): 6 × (1 - 0.25) = 4.5
Step 4: WACC
What a strong candidate does: Weight each cost by its share of the funding: 40 percent debt, 60 percent owners.
WACC (percent): 0.4 × 4.5 + 0.6 × 12 = 9
Step 5: Economic profit
What a strong candidate does: The 6 point gap between ROIC and WACC, on EUR 10 million.
Economic profit (EUR millions a year): (15 - 9) ÷ 100 × 10 = 0.6
Step 6: Check it another way
What a strong candidate does: The rent on all the money is 9 percent of EUR 10 million. Take that from NOPAT.
NOPAT minus the rent on capital (EUR millions): 1.5 - 10 × 0.09 = 0.6

The recommendation to listen for

At the end, say: "The CEO walks in. What is your recommendation?"

Yes, the chain creates value: about EUR 0.6 million a year of economic profit. It earns a 15 percent return on invested capital, because NOPAT is EUR 1.5 million on EUR 10 million. That capital costs only 9 percent, because debt at 4.5 percent after tax funds 40 percent of it and owners expect 12 percent. The real question is whether that 6 point gap can last. Suppose any rival can open the same shops with the same ovens. Then new bakeries will arrive and prices will fall until the gap closes. So the next step is to find what, if anything, stops rivals from copying it. It could be a lower cost, a reason customers pay more, or something else.

Risks a strong answer names: The owners' 12 percent is an estimate; a higher figure shrinks the gap; One good year is not an advantage; check the gap over five or more years.

Score the candidate

Score each criterion from 1 to 5. A 2 or a 4 sits between the descriptions.

This case has no exhibit. Score Exhibit reading on how the candidate used the data you gave them: did they pick out the number that matters and say what it means?

Structuring

1: No clear structure, or a memorized framework that does not fit the problem.
3: A sensible structure, but with some overlap, a gap, or no clear priority.
5: A structure built for this problem, with no overlap and no gaps, a stated hypothesis, and a clear first step.

Math

1: Frequent errors, no units, or needed heavy help to finish.
3: Right answers but slow or messy working, or one error caught late.
5: Accurate and clearly narrated, with units, a sense check, and what the number means.

Exhibit reading

1: Read the chart aloud without finding the number that matters.
3: Found the key number but gave only part of the so-what.
5: Pulled the right number quickly and said what it means for the case.

Synthesis

1: Summarized what was done, with no clear answer.
3: Gave an answer, but with weak reasons or no next step.
5: Answer first, then two or three reasons with numbers, the main risk, and next steps.

Communication

1: Hard to follow: long silences, no signposting.
3: Clear most of the time, with some rambling.
5: Calm and concise, signposted each step, and checked in with the interviewer.

Total

0 out of 25

Score all five criteria to see the band and the feedback template.

Next: another case in Partner mode

Swap roles and run the next case, so you both practise answering and scoring.

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