Quisco Systems has 6.1 billion shares outstanding and a share price of $ 17.15.
ID: 2819940 • Letter: Q
Question
Quisco Systems has 6.1 billion shares outstanding and a share price of $ 17.15. Quisco is considering developing a new networking product in house at a cost of $ 470 million. Alternatively, Quisco can acquire a firm that already has the technology for $ 879 million worth (at the current price) of Quisco stock. Suppose that absent the expense of the new technology, Quisco will have EPS of $ 0.71.
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. Quisco's new EPS would be .. $? (Please round to the nearest cent)
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.
Please Round to the nearest cent.
Que o Systems has 6 bilion shares outstanding and a share of $17 5 ui 00 O idering deve ng a new networking product worth et the current pnce) of Quisco stock. Suppose thet absent the expense at the new technclagy, Quisco will have EPS at SD.1 a Suppose u sco develops he product in house hat impact would the development cos house a a o st S47 million Alternati el Quisco can acquire a m that alread has he 1echnology or $879 million t have on Quisco's EPS? Assume al costs ere incurred this year and are treated as an R&D expense. Qusco's tax rate is 35%, end the number of shares outstanding is b. Suppoe Quisco docs not dovelop the product in house but instoad acquires the technology What cffect would the acquisition have on Quisco's EP3 this year? (Notc that acquisition cxpcnises do not appoar dircclly on the income statement Assume the firm was acquired at the start at me year and has no revenues or expenses ot its own so that the e ect on FPS due to ne change in the num erat shares outstan ng c. Which method of ecquiring the technology has a smaller impact on eamings? Is this method cheaper? ExplainExplanation / Answer
a. New EPS = Current EPS - R& D Expense per share
New EPS = $0.71 - ($470 Million * (1 - Tax) / 6100 Million)
New EPS = $0.71 - ($470 Million * (1 - 0.35) / 6100 Million)
New EPS = $0.71 - ($305.50 / 6100 Million)
New EPS = $0.71 - $0.05
New EPS = $0.66 per Share
b.
Current Earnings = Current EPS * Shares O/s = $0.71 * 6100 Million = 4331 Million
New EPS = Net Income / (Current Equity + New Issue)
New EPS = 4331 Million / (6100 Million + $879 Million / $17.15)
New EPS = 4331 Million / (6100 Million + 51.25)
New EPS = $0.704 or $0.70
c. As EPS is higher in the acquiring of technology from firm than making product inhouse thus Acquiring the firm is a cheaper and good option