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