General Motors Corporation reported a deficit per share in 1993 of $4.85, following losses in the two earlier years (The average earnings per share is negative.) The company had assets, with a book value of $25 billion, and spent almost $7 billion on capital expenditures in 1993, which was partially offset by a depreciation charge of $6 billion. The firm had $19 billion in debt outstanding, on which it paid interest expenses of $1.4 billion. It intends to maintain a debt ratio (D/(D+E)) of 50%. The working capital requirements of the firm are negligible and the stock has a beta of 1.10. In the last normal period of operations for the firm between 1986 and 1989, the firm earned an average return on assets of 12%. (Return on Assets = Earnings before interest and taxes (1- tax rate)/ Total Assets; The tax rate was 40%.) The treasury bond rate is 7%. Once earnings are normalized, GM expects them to grow 5% a year forever and capital expenditures and depreciation to keep track.
a. Estimate the value per share for GM, assuming earnings are normalized instantaneously.
b. How would your valuation be affected if GM is not going to reach its normalized earnings until 1995 (in two years)?