Question

Pelamed Pharmaceuticals has EBIT of $ 110 million in 2012. In addition, Pelamed has interest expenses of $47

million and a corporate tax rate of 30 %

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

a)

EBIT | 110 |

less:Interest expense | -47 |

EBT | 63 |

Less:Tax expense (63*30%) | -18.9 |

Net Income | 44.1 million or 44,100,000 |

b)

net income plus interest payments = 44.10 + 47

= 91.1 million or 91,100,000

c)

EBIT | 110 |

less:Interest expense | 0 |

EBT | 110 |

Less:Tax expense (110*30%) | -33 |

Net Income | 77 million or 77,000,000 |

Net income is less as compared to part b.This is so because interest expense is a tax deductible expenditure on which tax saving/tax shield is available.

d)Amount of tax shield = Interest expense* tax rate

= 47,000,000 *30%

= 14,100,000

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