Question

Pelamed Pharmaceuticals has EBIT of $ 325$325 million in 2012. In​ addition, Pelamed has interest expenses of $ 125$125 million and a corporate tax rate of 40 %40%. a. What is​ Pelamed's 2012 net​ income? b. What is the total of​ Pelamed's 2012 net income plus interest​ payments? c. If Pelamed had no interest​ expenses, what would its 2012 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​ 2012?

Answer 1

(a) The firms net income is $120 million

(b) Total of​ Pelamed's 2012 net income plus interest​ payments is $245 million

(c) Without interest expenses, Pelamed's 2012 net income is $195 million

(d) The amount of​ Pelamed's interest tax shield in​ 2012 is $50 million

Step-by-step explanation:

(a) Net income = (EBIT - Interest expenses) × (1- tax rate)

= ($325 - $125) million × (1 - 40%)

= $200 million × 0.60

= $120 million

(b) Net income plus Interest payments = $120 million + $125 million

= $245 million

(c) Net income without interest = (EBIT) × (1- tax rate)

= $325 million × (1 - 40%)

= $325 million × 0.60

= $ 195 million

(d) Interest tax shield = interest expense × tax rate

= $125 million × 40%

= $50 million