Question

Pelamed Pharmaceuticals has EBIT of

$ 379$379

million in 2011. In​ addition, Pelamed has interest expenses of

$ 97$97

​million, and a corporate tax rate of

30 %30%.

a. What is​ Pelamed's 2011 net​ income?

b. What is the total of​ Pelamed's 2011 net income plus interest​ payments?

c. If Pelamed had no interest​ expenses, what would its 2011 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​ 2011?

Answer 1

a. The net income is computed as shown below:

= (EBIT - interest expense) x (1 - tax rate)

= ($ 379 million - $ 97 million) x (1 - 30%)

= $ 197 million Approximately

b. The sum is computed as follows:

= $ 197 million + $ 97 million

= $ 294 million Approximately

c. The net income is computed as follows:

= (EBIT) x (1 - tax rate)

= $ 379 million x (1 - 30%)

= $ 265 million Approximately

This is lower by $ 29 million as compared with part b

d. The interest tax shield is computed as follows:

= Interest expense x tax rate

= $ 97 million x 30%

= $ 29 million Approximately

Feel free to ask in case of any query relating to this question