Question

# Pelamed Pharmaceuticals has EBIT of \$446 million in 2012. In​ addition, Pelamed has interest expenses of...

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?

#### Homework Answers

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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