Quisco Systems has billion shares outstanding and a share price of 18.78 . Quisco is considering developing a new networ
Posted: Tue Nov 16, 2021 8:22 am
Quisco Systems has billion shares outstanding and a share price
of 18.78 . Quisco is considering developing a new networking
product in house at a cost of 501 million. Alternatively, Quisco
can acquire a firm that already has the technology for919 million
worth (at the current price) of Quisco stock. Suppose that absent
the expense of the new technology, Quisco will have EPS of
0.94 . 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.
of 18.78 . Quisco is considering developing a new networking
product in house at a cost of 501 million. Alternatively, Quisco
can acquire a firm that already has the technology for919 million
worth (at the current price) of Quisco stock. Suppose that absent
the expense of the new technology, Quisco will have EPS of
0.94 . 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.