CASE PROBLEM: 15% LOP Bhd has 6.50 billion shares outstanding and a share price of RM19.00. LOP Berhad is considering de

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CASE PROBLEM: 15%
LOP Bhd has 6.50 billion shares outstanding and a share price of
RM19.00. LOP Berhad is considering developing a new networking
product in-house at a cost of RM600 million. Alternatively, LOP
Berhad can acquire a firm that already has the technology for RM900
million worth (at the current price) of LOP Berhad stock. Suppose
that absent the expense of the new technology, LOP will have EPS of
RM0.80.
Required:
Undertake the following questions in about 1500 words
(plus or minus 5%).
(Your write-up should be plus or minus 10% of the word count
above).
No.
Assessment Criteria
Weightage
Marks Allotted by Lecturer
Section
a.
Suppose LOP develops the product in-house. Discuss the impact
would the development cost have on LOP’s EPS? Assume all costs are
incurred this year and are treated as an R&D expense, LOP’s tax
rate is 35%, and the number of shares outstanding is
unchanged.
25%
b.
Suppose LOP does not develop the product in-house but instead
acquires the technology. Discuss the effect would the acquisition
have on LOP’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.)
25%
c.
Which method of acquiring the technology has a smaller impact on
earnings? Is this method cheaper? Critically analysis.
25%
d.
Can a firm with positive net income run out of cash? Critically
evaluate.
25%
Others
Presentation of the analysis: