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Pelamed Pharmaceuticals has EBIT of $215 million in 2012. In​ addition, Pelamed has interest expenses of...

Pelamed Pharmaceuticals has EBIT of $215 million in 2012. In​ addition, Pelamed has interest expenses of $96 million and a corporate tax rate of 35%. 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?

Solutions

Expert Solution

Answer a.

EBIT = $215 million
Interest Expense = $96 million

EBT = EBIT - Interest Expense
EBT = $215 million - $96 million
EBT = $119 million

Taxes = EBT * Tax Rate
Taxes = $119 million * 35%
Taxes = $41.65 million

Net Income = EBT - Taxes
Net Income = $119 million - $41.65 million
Net Income = $77.35 million

Answer b.

Total of Net Income and Interest Payments = Net Income + Interest Expense
Total of Net Income and Interest Payments = $77.35 million + $96 million
Total of Net Income and Interest Payments = $173.35 million

Answer c.

EBIT = $215 million

EBT = EBIT - Interest Expense
EBT = $215 million - $0
EBT = $215 million

Taxes = EBT * Tax Rate
Taxes = $215 million * 35%
Taxes = $75.25 million

Net Income = EBT - Taxes
Net Income = $215 million - $75.25 million
Net Income = $139.75 million

Net income in part (c) is higher than the net income in part (a).

Answer d.

Interest Tax Shield = Interest Expense * Tax Rate
Interest Tax Shield = $96 million * 35%
Interest Tax Shield = $33.60 million

jeff jeffy answered 1 year ago
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