Woods Construction Corp. has no debt and expects to earn annual NOP of $5.8 million indefinitely. Woods has a required return on assets of 11%, a corporate tax rate of 21%, and there are no taxes on dividends or interest at the personal level. In any year, there is a 10% chance that Woods will go bankrupt.

If bankruptcy occurs it will result in $10 million 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?

b. What is the firm value for Woods?

c. What is the revised firm value for Woods’ if its shareholders face a 28% personal tax rate on stock-related income.