Reference no: EM132707583

VW Corporation reported a deficit per share in 2013 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 2013, 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 (Debt/(Debt+Equity)) 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 2010 and 2013, the firm earned an average ROC of 12%. (The tax rate was 40%.) The Treasury bond rate is 7%.

Once earnings are normalized, VW expects them to grow 5% a year forever, and capital expenditures and depreciation to keep track.

a. Estimate the value of the equity assuming the earnings are normalized instantaneously.

b. How would your valuation be affected if VW is not going to reach its normalized earnings until 2015 (in two years)?