Question

# Pelamed Pharmaceuticals had EBIT of \$ 178 million in 2018. In​ addition, Pelamed had interest expenses...

Pelamed Pharmaceuticals had EBIT of \$ 178 million in 2018. In​ addition, Pelamed had interest expenses of \$ 77 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​?

(a)- Pelamed's 2018 net​ income

Pelamed's 2018 net​ income = [EBIT – Interest Expenses] x (1 – Tax Rate)

= [\$178 Million - \$77 Million] x (1 – 0.21)

= \$101 Million x 0.79

= \$79.79 Million

(b)-Total of​ Pelamed's 2018 net income plus interest​ payments

Total of​ Pelamed's 2018 net income plus interest​ payments = Net Income + Interest Expenses

= \$79.79 Million + \$77 Million

= \$156.79 Million

(c)-2018 net​ income if Pelamed had no interest expenses

Pelamed's 2018 net​ income = EBIT x (1 – Tax Rate)

= \$178 Million x (1 – 0.21)

= \$178 Million x 0.79

= \$140.62 Million

(d)-The amount of​ Pelamed's interest tax shield in 2018​

Pelamed's interest tax shield in 2018​ = Interest Expenses x Tax Rate

= \$77 Million x 0.21

= \$16.17 Million

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