15-7. Pelamed Pharmaceuticals has EBIT of $300 million in 2006. In addition, Pel

Question

15-7. Pelamed Pharmaceuticals has EBIT of $300 million in 2006. In addition, Pelamed has interest expenses of $90 million and a corporate tax rate of 35%.

a. What is Pelamed's 2006 net income? (round to the nearest million)

b. What is the total of Pelamed's 2006 net income plus interest payments? (round to the nearest million)

c. If Pelamed had no interest expenses, what would its 2006 net income be?(round to the nearest million)

d. What is the amount of Pel amed's interest tax shield in 2006?(round to the nearest million)

Explanation / Answer

Okay here we go again...

a) Netincome = EBIT - Interest - Taxes
= (300 - 90) x (1 - 0.35) = $136.5 million

b) Netincome + Interest = 136.5 + 90 = $226.5 million
c) Netincome = EBIT - Taxes = 300 x (1 - 0.35) = $195million
which is 31.5million lower than b

d) Interest tax shield = 90 x 0.35 = $31.5 million

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