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