Pelamed Pharmaceuticals had EBIT of $409 million in 2010, In addition, Pelamed h

Question

Pelamed Pharmaceuticals had EBIT of $409 million in 2010, In addition, Pelamed had interest expenses of $131 million and a corporate tax rate of 40%. a. What is Pelamed's 2010 net income? b. What is the total of Pelamed's 2010 net income plus interest payments? c. If Pelamed had no interest expenses, what would have been its 2010 net income? How does it compare to your answer in part (a)? d. What is the amount of Pelamed's interest tax shield in 2010? a. What is Pelamed's 2010 net income? The 2010 net income is $million. (Round to the nearest integer.)

Explanation / Answer

Question - a

Pelamed's 2010 net income = (EBIT - I ) ( 1 - Tax rate) = (409 - 131 ) * ( 1 - 0.40) = 166.8

= 167 ...............is the final answer

Question - b

Net income + Interest payments = 166.80 + 131 = 297.8 or 298 .........is the final answer

Question - c

If there is no interest expense ....... we have Net Income = EBIT ( 1 - Tax rate)

= 409 ( 1 - 0.40) = 245.4 (or) 245 ............. is the final answer

Net income is lowered by [ 297.8 - 245.4] = 52 millions compared to having interest expenses.This is due to loss of tax saving or excessive taxing of income in the absence of interest expenses.

Question - d

Tax shield on interest expenses = 131 * 0.40 = 52.4 or  = 52 Million..................is the final answer

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