Question

# Pelamed Pharmaceuticals has EBIT of \$ 379\$379 million in 2011. In​ addition, Pelamed has interest expenses...

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?

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

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