Systems has 6.45 billion shares outstanding and a share price of $17.25. Quisco is considering developing a new networking product in-house at a cost of $497 million. Alternatively, Quisco can acquire a firm that already has the technology for $899 million worth (at the current price) of Quisco stock. Suppose that absent the expense of the new technology, Quisco will have EPS of $0.828. a. Suppose Quisco develops the product in-house. What impact would the development cost have onQuisco's EPS? Assume all costs are incurred this year and are treated as an R&D expense, Quisco's tax rate is 40 %, 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
Systems has 6.45 billion shares outstanding and a share price of $17.25. Quisco is considering developing a new networking product in-house at a cost of $497 million. Alternatively, Quisco can acquire a firm that already has the technology for $899 million worth (at the current price) of Quisco stock. Suppose that absent the expense of the new technology, Quisco will have EPS of $0.828. a. Suppose Quisco develops the product in-house. What impact would the development cost have onQuisco's EPS? Assume all costs are incurred this year and are treated as an R&D expense, Quisco's tax rate is 40 %, 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
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Systems has 6.45 billion shares outstanding and a share price of $17.25. Quisco is considering developing a new
networking product in-house at a cost of $497 million. Alternatively, Quisco can acquire a firm that already has the
technology for $899 million worth (at the current price) of Quisco stock. Suppose that absent the expense of the new
technology, Quisco will have EPS of $0.828. a. Suppose Quisco develops the product in-house. What impact would
the development cost have onQuisco's EPS? Assume all costs are incurred this year and are treated as an R&D expense,
Quisco's tax rate is 40 %, 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
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