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You are trying to estimate the terminal value for lowies a

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You are trying to estimate the terminal value for Lowie's, a retail firm, at the end of year 5. The firm is expected to have after-tax operating earnings of $ 250 million year 6 and these earnings are expected to grow 4% a year in perpetuity. The firm is also 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 5.

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

Reference no: EM13480261

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