Woods Construction Corp. has no debt and expects to earn annual NOP of $6,400,000 indefinitely. Woods has a required return on assets of 13%, a corporate tax rate of 23%, and there are no taxes on dividends or interest at the personal level. In any year, there is a 20% chance that Woods will go bankrupt. If bankruptcy occurs it will result in $11,000,000 worth of direct and indirect costs that would be discounted at the required return for assets. a. What is the present value of expected bankruptcy costs for Woods? The present value of expected bankruptcy costs for Woods is $ ?. (Round to the nearest dollar.) b. What is the firm value for Woods? The firm value for Woods is $? (Round to the nearest dollar.) c. What is the revised firm value for Woods if its shareholders face a 28% personal tax rate on stock-related income? If its shareholders face a 28% personal tax rate on stock-related income, the revised firm value for Woods is $ ? (Round to the nearest dollar.)
Woods Construction Corp. has no debt and expects to earn annual NOP of $6,400,000 indefinitely. Woods has a required return on assets of 13%, a corporate tax rate of 23%, and there are no taxes on dividends or interest at the personal level. In any year, there is a 20% chance that Woods will go bankrupt. If bankruptcy occurs it will result in $11,000,000 worth of direct and indirect costs that would be discounted at the required return for assets. a. What is the present value of expected bankruptcy costs for Woods? The present value of expected bankruptcy costs for Woods is $ ?. (Round to the nearest dollar.) b. What is the firm value for Woods? The firm value for Woods is $? (Round to the nearest dollar.) c. What is the revised firm value for Woods if its shareholders face a 28% personal tax rate on stock-related income? If its shareholders face a 28% personal tax rate on stock-related income, the revised firm value for Woods is $ ? (Round to the nearest dollar.)
Chapter11: The Corporate Income Tax
Section: Chapter Questions
Problem 11MCQ
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Woods Construction Corp. has no debt and expects to earn annual NOP of $6,400,000 indefinitely. Woods has a required return on assets of 13%, a corporate tax rate of 23%, and there are no taxes on dividends or interest at the personal level. In any year, there is a 20% chance that Woods will go bankrupt. If bankruptcy occurs it will result in $11,000,000 worth of direct and indirect costs that would be discounted at the required return for assets.
a. What is the present value of expected bankruptcy costs for Woods?
The present value of expected bankruptcy costs for Woods is
$ ?. (Round to the nearest dollar.)
b. What is the firm value for Woods?
The firm value for Woods is $? (Round to the nearest dollar.)
c. What is the revised firm value for Woods if its shareholders face a 28% personal tax rate on stock-related income?
If its shareholders face a 28% personal tax rate on stock-related income, the revised firm value for Woods is $ ? (Round to the nearest dollar.)
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