Pelamed Pharmaceuticals has EBIT of $ 325$325 million in 2012. In addition, Pelamed has interest expenses of $ 125$125 million and a corporate tax rate of 40 %40%. 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?

(a) The firms net income is $120 million

(b) Total of Pelamed's 2012 net income plus interest payments is $245 million

(c) Without interest expenses, Pelamed's 2012 net income is $195 million

(d) The amount of Pelamed's interest tax shield in 2012 is $50 million

Explanation:

(a) Net income = (EBIT - Interest expenses) × (1- tax rate)

= ($325 - $125) million × (1 - 40%)

= $200 million × 0.60

= $120 million

(b) Net income plus Interest payments = $120 million + $125 million

= $245 million

(c) Net income without interest =  (EBIT) × (1- tax rate)

= $325 million × (1 - 40%)

= $325 million × 0.60

= $ 195 million

(d) Interest tax shield = interest expense × tax rate

= $125 million × 40%

= $50 million

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