Question

Pelamed Pharmaceuticals had EBIT of $ 475 million in 2018. In​ addition, Pelamed had interest expenses of $ 205 million and a corporate tax rate of 21 %.
a. What is​ Pelamed's 2018 net​ income?

The 2018 net income is ​$____million.  ​(Round to the nearest​ integer.)

b. What is the total of​ Pelamed's 2018 net income plus interest​ payments?

The total of​ Pelamed's 2018 net income plus interest payments is ​$___ million.

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​)?

The 2018 net income would be ​$____ million.

The 2018 net income with no interest expense is ​$_____ million ___(higher/lower)____ than the 2018 net income with interest​ expense,

d. What is the amount of​ Pelamed's interest tax shield in 2018​?

​Pelamed's interest tax shield in 2018 is ​$____ million.

Answer 1

Solution :

a. Pelamed's 2018 net​ income :

The formula for calculating the net income is

= ( EBIT – Interest Expense ) * ( 1 – Tax rate )

As per the information available we have

EBIT = $ 475 million ; Interest Expense = $ 205 million ; Tax rate = 21 % = 0.21 ;

Applying the above information in the formula we have net income as

= ( $ 475 million - $ 205 million ) * ( 1 – 0.21 )

= $ 270 million * 0.79

= $ 213.30 million ;

= $ 213 million ( when rounded off to the nearest integer )

Thus Pelamed's 2018 net​ income = $ 213 million ;

b.Total of​ Pelamed's 2018 net income plus interest​ payments :

As per the information available we have

Net Income = $ 213 million   ; Interest Payments = $ 205 million   ;

Thus the of total of​ Pelamed's 2018 net income plus interest​ payments = $ 213 million + $ 205 million

= $ 418 million

c. If Pelamed’s 2018 net income if it had no interest​ expenses :

The formula for calculating the net income is

= ( EBIT – Interest Expense ) * ( 1 – Tax rate )

As per the information available we have

EBIT = $ 475 million ; Interest Expense = $ 0 million ; Tax rate = 21 % = 0.21 ;

Applying the above information in the formula we have net income as

= ( $ 475 million - $ 0 million ) * ( 1 – 0.21 )

= $ 475 million * 0.79

= $ 375.25 million ;

= $ 375 million ( when rounded off to the nearest integer )

Thus Pelamed's 2018 net​ income if it had no interest expense = $ 375 million ;

Pelamed's 2018 net​ income if it had no interest expense is higher that the 2018 net income with interest expense.

The 2018 net income with no interest expense is ( $ 375 million - $ 213 million ) = ​$ 162 million higher than the 2018 net income with interest​ expense.

Thus the 2018 net income with no interest expense is ​$ 162 million higher than the 2018 net income with interest​ expense.

d. Pelamed's interest tax shield in 2018 :

The formula for calculating the Interest tax shield is = Interest expense* Tax rate

As per the information available we have

Interest expense = $ 205 million   ; Tax rate = 21 % = 0.21 ;

Applying the above information in the formula we have the Interest tax shield as

= $ 205 million * 0.21

= $ 43.05 million

= $ 43 million ( when rounded off to the nearest integer )

Thus Pelamed's interest tax shield in 2018 = $ 43 million