Question

Pelamed Pharmaceuticals had EBIT of

$270

million in

2018.

In​ addition, Pelamed had interest expenses of

$68

million and a corporate tax rate of

21%.

a. What is​ Pelamed's

2018

net​ income?

b. What is the total of​ Pelamed's

2018

net income plus interest​ payments?

c. If Pelamed had no interest​ expenses, what would have been its

2018

net​ income? How does it compare to your answer in part

​(a​)?

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

2018​?

Answer 1

Solution

a. Net income=(EBIT-Intrest)*(1-tax rate)

=(270-68)*(1-.21)

Net income=159.58 million

b.Net income+intrest payments=159.58 +68

=227.58 million

c. If there was no intrest expense

Net income=(EBIT-intrest)*(1-tax rate)

=(270-0)*(1-.21)

=213.30

The net income is more in this case as the intrest expense has decreased.but the taxes in this case have increased.

d.Intrest tax shield=Intrest amount*tax rate

Intrest tax shield=68*.21=14.28 million

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answered by: anonymous