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 intended to maintain a debt ratio [D/(D + E)]

of 50%. The working capital requirements of the firm were 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 capital of 12%. The Treasury bond rate was 7%, and the market risk premium is 5.5%.

Once earnings are normalized, GM expected them to grow 5% a year forever, and capital expenditures and depreciation to grow at the same rate.

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)?