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Does a bakery chain earn its cost of capital?
The prompt
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 and 60 percent by owners, who expect 12 percent a year for the risk. Interest is tax deductible. Does the chain create value, and how much a year?
Your interviewer will share data as you ask for it. Ask clarifying questions, state a hypothesis, then lay out your structure out loud before you calculate.
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