Should a bakery borrow to expand?
The companies and data in this case are made up.
A bakery operates eight stores. Its owner wants to borrow $800,000 to open four more. Assess whether the expansion can support the proposed debt, then recommend a next step.
Suggested time: 20 minutes for a written response, then 5 minutes for the challenge. This is a practice exercise, not a full Regionals paper or a statement of the final exam format.
A · Existing business, annual figures
| Measure | Amount |
|---|---|
| Revenue | $2,400,000 |
| Store operating costs | $1,680,000 |
| Central overhead | $360,000 |
| Operating cash flow before debt service | $300,000 |
| Existing annual debt service | $120,000 |
| Unrestricted cash | $150,000 |
B · Proposed four-store expansion, annual steady-state estimate
| Measure | Amount |
|---|---|
| Revenue per new store | $250,000 |
| Variable costs | 60% of new-store revenue |
| Fixed costs per new store | $70,000 |
| Additional central overhead | $40,000 |
| New annual debt service | $200,000 |
| Opening investment, funded by new loan | $800,000 |
Evidence limit: Operating cash flow and operating profit are different measures. The new-store estimate excludes taxes, working-capital changes and maintenance investment. There is no evidence that new stores reach steady-state sales immediately.
Your task
- Calculate current operating surplus before financing and cash remaining after existing debt service. Explain why the two figures differ.
- Calculate the expansion’s operating contribution after additional overhead. How does it compare with new debt service?
- Recommend whether to borrow now. Test a 20% downside to new-store sales and name the most important missing evidence.
Your answer stays on this page. It is not submitted or saved; copy it before leaving.
Follow-up challenge
The owner points to $150,000 cash in the bank as proof the loan is affordable. Does that change your recommendation?
Read a worked response
Existing operating surplus is $360,000: $2.4 million less $1.68 million store costs and $360,000 overhead. Supplied operating cash flow is $300,000; after $120,000 existing debt service, $180,000 remains. The exhibit does not explain the $60,000 profit-to-cash difference, so I would request a cash-flow reconciliation.
Four new stores produce $1 million revenue. Subtract $600,000 variable costs, $280,000 fixed store costs and $40,000 central overhead: only $80,000 remains before the $200,000 new debt service. The expansion alone is short $120,000, even before omitted cash needs. Combining the existing $180,000 residual with this simplified shortfall leaves just $60,000; this is a screening calculation, not a complete cash-flow forecast.
At 20% lower new-store sales, revenue is $800,000 and variable costs $480,000. After $320,000 fixed and central costs, expansion contribution is zero. Existing residual cash then falls $20,000 short of new debt service. I would defer the four-store loan and test one location or renegotiate the scale and financing. I would need monthly ramp-up, working-capital and capital-spending forecasts, lease commitments and loan terms. The $150,000 cash balance is a buffer, not recurring capacity to repay debt.
Other recommendations can earn full credit when they follow from the exhibits and acknowledge the limits.
Score your response · 100-point practice rubric
This self-assessment assigns 20 points to each category. These weights apply only to this practice exercise; official competition weights remain unpublished.
| Category | Evidence needed for 20/20 |
|---|---|
| Interpretation | Separate existing operations, incremental expansion and cash from accounting surplus. |
| Evidence | Use debt service, overhead and the downside sales exhibit. |
| Reasoning | Calculate $80,000 base contribution and zero downside contribution without treating them as complete cash flow. |
| Judgment | Choose an action and assess liquidity, ramp-up and the limits of the forecast. |
| Defense & adaptability | Explain why a one-time cash balance cannot cover a recurring funding shortfall indefinitely. |
| Score per category | Practice standard |
|---|---|
| 0 | Missing, irrelevant or fundamentally incorrect. |
| 5 | Some relevant observations, with major errors or unsupported assertions. |
| 10 | Partly correct; important evidence or a reasoning step is missing. |
| 15 | Sound analysis with a minor omission or an underdeveloped limitation. |
| 20 | Accurate, supported and complete for the task; assumptions and limits are explicit. |
The worked response illustrates full-credit evidence in the first four categories. For Defense & adaptability, score your own response to the follow-up challenge; reading the model answer does not demonstrate that skill.
What to practice
A company’s finances and a money decision it has to make.
- Financial statements
- Valuation logic
- Capital allocation
- Risk and return
- Financing choices
- Portfolio reasoning
- Business performance
How to use this case
- Read the case and restate the decision in one sentence. List the quantities, units and constraints before calculating.
- Work each question without the model response. Write the calculation and the inference separately.
- Compare your work with the model. Mark one arithmetic error, missing assumption or unsupported claim to correct.
- Ask a partner to challenge your recommendation. Give a specific condition that would change it.
Skills checklist
| Skill | Application in this case |
|---|---|
| Interpretation | Separate existing operations, incremental expansion and cash from accounting surplus. |
| Evidence | Use debt service, overhead and the downside sales exhibit. |
| Reasoning | Calculate $80,000 base contribution and zero downside contribution without treating them as complete cash flow. |
| Judgment | Choose an action and assess liquidity, ramp-up and the limits of the forecast. |
| Defense & adaptability | Explain why a one-time cash balance cannot cover a recurring funding shortfall indefinitely. |
Common mistakes
- Quoting a number without explaining what it changes.
- Treating a forecast as an observed fact, or a correlation as a causal effect.
- Optimizing revenue while ignoring cost, risk or opportunity cost.
- Listing uncertainties without making a provisional decision.
A second practice session
Change one numerical assumption in the exhibit. Recalculate the decision threshold, explain whether your recommendation changes, and say which original assumptions still matter. Have a partner check units and arithmetic.
The content areas above describe preparation topics. They do not assign exam percentages or finalize time limits, permitted resources or grading weights. See the handbook draft for adopted rules.