Quisco Systems has 6.3 billion shares outstanding and a share price of $ 17.03. Quisco is considering developing a new networking product in house at a cost of $ 457 million.​ Alternatively, Quisco can acquire a firm that already has the technology for $ 889 million worth​ (at the current​ price) of Quisco stock. Suppose that absent the expense of the new​ technology, Quisco will have EPS of $ 0.78. a. Suppose Quisco develops the product in house. What impact would the development cost have on​ Quisco's EPS? Assume all costs are incurred this year and are treated as an​ R&D expense,​ Quisco's tax rate is 35 %​, and the number of shares outstanding is unchanged. b. Suppose Quisco does not develop the product in house but instead acquires the technology. What effect would the acquisition have on​ Quisco's EPS this​ year? (Note that acquisition expenses do not appear directly on the income statement. Assume the firm was acquired at the start of the year and has no revenues or expenses of its​ own, so that the only effect on EPS is due to the change in the number of shares​ outstanding.) c. Which method of acquiring the technology has a smaller impact on​ earnings? Is this method​ cheaper? Explain.

Respuesta :

Answer:

Explanation:

current earnings available to equity shareholders :

EPS = current earnings available to equity shareholders / Shares outstanding

0.78 = current earnings available to equity shareholders / 6.3 billion

current earnings available to equity shareholder = 0.74*6.3 billion

= 4.662 billion

a) Calculation of EPS(develops the product in house)

Revised earnings available to equity shareholder = 4.662 billion - (.457 million*0.65) = 4.662 billion-0.297 billion

= 4.365 billion

Revised EPS = 4.365 billion / 6.3 billion

= 0.69

b) Calculation of EPS (does not develops the product in house)

current earnings available to equity shareholder = 4.662 billion

New shares issued = 0.889 billion/17.03

= 0.05202 billion

New shares Outstanding = 6.3 billion+ .05202 billion

= 6.3520 billion

Revised EPS = 4.662 billion / 6.3520 billion

= .73

c) Impact on EPS

Developing the product in house is cheaper,but it will affect the share price greatly since it has great impact on EPS.