Question

Pelamed Pharmaceuticals has EBIT of

$446

million in 2012. In addition, Pelamed has interest expenses of

$114

million and a corporate tax rate of

35%.

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

part

(b)?

d. What is the amount of Pelamed's interest tax shield in 2012?

Answer #1

**Given,**

**EBIT = $446 million**

**Interest expenses = $114 million**

**Tax rate = 35% or 0.35**

**Solution :-**

**(a)**

**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**

**(b)**

**Net income + Interest expense = $215.80 million + $114
million = $329.80 million**

**(c)**

**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).**

**(d)**

**Interest tax shield = Interest expense x tax
rate**

**= $114 million x 0.35 = $39.90 million**

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