Question

Pelamed Pharmaceuticals had EBIT of $ 208 million in 2018. In​ addition, Pelamed had interest expenses of $ 57 million and a corporate tax rate of 22 %.

a. What is​ Pelamed's 2018 net​ income?

The 2018 net income is ​$__ million.  ​(Round to the nearest​ integer.)

b. What is the total of​ Pelamed's 2018 net income plus interest​ payments?

The total of​ Pelamed's 2018 net income plus interest payments is $____.

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​)?

The 2018 net income would be ​$____.

The 2018 net income with no interest expense is $_____ ____(Higher/lower)____than the 2018 net income with interest​ expense,

d. What is the amount of​ Pelamed's interest tax shield in 2018​?

​Pelamed's interest tax shield in 2018 is ​$_____million.

Answer 1

Answer a.

Net Income = (EBIT - Interest Expense) * (1 - Tax Rate)
Net Income = ($208 million - $57 million) * (1 - 0.22)
Net Income = $151 million * 0.78
Net Income = $118 million

Answer b.

Net Income + Interest Expense = $118 million + $57 million
Net Income + Interest Expense = $175 million

Answer c.

Net Income = (EBIT - Interest Expense) * (1 - Tax Rate)
Net Income = ($208 million - $0 million) * (1 - 0.22)
Net Income = $208 million * 0.78
Net Income = $162 million

The 2018 net income with no interest expense is $44 million ($162 million - $118 million) higher than the 2018 net income with interest expense.

Answer d.

Interest Tax Shield = Interest Expense * Tax Rate
Interest Tax Shield = $57 million * 0.22
Interest Tax Shield = $13 million