You want to find the terminal value for Acme Inc. in five years. Acme is expected to have aftertax operating income of $250M in year six and this is expected to grow 4% a year in perpetuity. Acme is expected to have a return on capital of 12% and a cost of capital of 9% in perpetuity.

a. Estimate the terminal value of the firm at the end of year five.

b. How much of this terminal value can be attributed to your assumption that your firm will earn excess returns forever?