Question

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​?

Answer 1

(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