Sunshine Corporation is a firm that specializes in casino business. In the most recent year, the firm reported $40 million in after-tax operating income, $30 million in capital expenditures and $10 million in depreciation. The firm expects all three items to grow at 8% for the next 5 years. Beyond the fifth year, the firm expects to be in stable growth and grow at 4% a year in perpetuity. You assume that earnings, capital expenditures and depreciation will grow at 2% in perpetuity and that your cost of capital is 10%. (There is no working capital.)

a) Estimate the terminal value of the firm in year 5. (5 marks)

b) What reinvestment rate and return on capital are you implicitly assuming in perpetuity? (4 marks)