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

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