You want to estimate the terminal value for Glabee Inc. at the end of year 5. You estimate that the constant growth rate in operating income after year 5 will be 2% in perpetuity. Youve also estimated the after-tax operating income for year 6 at $368 million. You believe that the firm has built a brand name that will allow it to generate excess returns in perpetuity. More specifically, you believe that in perpetuity, its return on capital will be 9.6% while its cost of capital will be 7.5%.

a) Given those assumptions, what is Glabees terminal value at the end of year 5?

b) Your manager is skeptical about the long run competitive advantage of Glabee and does not believe that Glabee will be able to generate excess returns in perpetuity. How much of your estimated terminal value can be imputed to your assumption regarding perpetual excess returns?