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**

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