Reference no: EM132014282

Based on management projections, Peter Corporation’s existing assets will provide operating cash flow of $1.2 billion next year. However, the existing line of business is in decline, and management forecasts that operating cash flows will decrease by 2% per year in perpetuity. Separately, Peter is about to invest $4.0 billion in a new project. That project would not generate any cash for the first two years. However, management forecasts that by the third year it would generate cash flow of $900 million, and that this cash flow would continue in perpetuity (with no growth). (Assume end of year cash flows.) Peter's balance sheet shows that it has liabilities with a face value of $2 billion. However, interest rates have decreased recently, and the fair market value of these liabilities is $2.4 billion. A discount rate of 11% per year is appropriate for valuing Peter's equity. (a) What is the market value of Peter's equity?