Question

Pelamed Pharmaceuticals had EBIT of $ 163 million in 2018. In​ addition, Pelamed had interest expenses of $ 79 million and a corporate tax rate of 22 %. a. What is​ Pelamed's 2018 net​ income? b. What is the total of​ Pelamed's 2018 net income plus interest​ payments? 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​)? d. What is the amount of​ Pelamed's interest tax shield in 2018​?

Answer 1

Solution:

a. Calculation of Net Income of Pelamed for 2018 :

As per the Information given in the question we have :

Earnings before Interest and Tax i.e., EBIT = $ 163,000,000

Interest expense = $ 79,000,000

Corporate tax @ 22 % = 0.22

We know that

Earnings before tax i.e., EBT = EBIT - Interest Expense

Thus EBT = $ 163,000,000 – 79,000,000 = $ 84,000,000

We know that

Net Income = EBT *( 1 – Tax rate )

Thus Net Income = $ 84,000,000 * ( 1 – 0.22 )

= $ 84,000,000 * 0.78 = $ 65,520,000

Thus Net Income of Pelamed for 2018 = $ 65,520,000

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

As per the information available we have

Net Income = $ 65,520,000     ;     Interest payments = $ 79,000,000

Thus the ( Net Income + Interest payments ) of Pelamed is

= $ 65,520,000 + $ 79,000,000 = $ 144,520,000

c. Calculation of 2018 Net Income of Pelamed if it had no interest​ expenses :

Net Income = EBIT * ( 1 Tax rate )

= $ 163,000,000 * ( 1 – 0.22 )

= $ 163,000,000 * 0.78

= $ 127,140,000

As per Part a, when Pelamed has an Interest Expense of $ 79,000,000 its net income is = $ 65,520,000

As per Part c, when Pelamed does not have an Interest Expense, the net Income = $ 127,140,000

Thus, on comparison it can be inferred that the Net Income of Pelamed is higher in 2018 if it did not have Interest Expenses

d. Calculation of amount of​ Pelamed's interest tax shield in 2018 : ​

Interest Tax shield = Interest amount * Tax rate

= $ 79,000,000 * 0.22

= $ 17,380,000

Thus Pelamed’s Interest tax shield = $ 17,380,000