Pelamed Pharmaceuticals has EBIT of
million in 2012. In addition, Pelamed has interest expenses of
million and a corporate tax rate of
a. What is Pelamed's 2012 net income?
b. What is the total of Pelamed's 2012 net income plus interest payments?
c. If Pelamed had no interest expenses, what would its 2012 net income be? How does it compare to your answer in
d. What is the amount of Pelamed's interest tax shield in 2012?
EBIT = $446 million
Interest expenses = $114 million
Tax rate = 35% or 0.35
Net income = (EBIT - Interest expenses) x (1 - tax rate)
= ($446 million - $114 million) x (1 - 0.35)
= $332 million x 0.65 = $215.80 million
Net income + Interest expense = $215.80 million + $114 million = $329.80 million
Net income = EBIT x (1 - tax rate)
= $446 million x (1 - 0.35)
= $446 million x 0.65 = $289.90 million
Which is $39.90 million ($329.80 - $289.90) lower than part (b).
Interest tax shield = Interest expense x tax rate
= $114 million x 0.35 = $39.90 million
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