Quisco Systems has 6.2 billion shares outstanding and a share price of $18.26. Q
ID: 2816813 • Letter: Q
Question
Quisco Systems has 6.2 billion shares outstanding and a share price of $18.26. Quisco is considering developing a new networking product in house at a cost of $482 million. Alternatively, Quisco can acquire a firm that already has the technology for $927 million worth (at the current price) of Quisco stock. Suppose that absent the expense of the new technology, Quisco will have EPS of $0.74. 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 o its own so trat he o effect on E S de he chante h he unle shares outstanding.) c. Which method of acquiring the technology has a smaller impact on earnings? Is this method cheaper? Explain.Explanation / Answer
Step 1: Calculation of current net income
EPS = Net income available to equity sahreholders / Shares Outstanding
Net Income = EPS * Shares Outstanding
= .74 * 6.2 billion
= 4.588 billion
Profit Before Tax(PBT) = Net Income/(1-tax rate)
= 4.588 billion / .65
= 7058.46 million
a) EPS when Quisco develop product in house
New Net Income = (PBT - Cost of in house production) * (1-tax rate)
= (7058.46 million - 482million)*.65
= 6576.46 million *.65
= 4274.699 million
New EPS = 4274.699 million / 6200 million
= $0.69
a) EPS when Quisco acquires the technology
Value of acquiree firm = 927 million
Price per share of acquirer firm = 18.26
No. of shares issued for acquisition = Value of acquiree firm/Price per share of acquirer firm
= 927 million / 18.26
= 50.767 million
New EPS = 4588 million / (6200 million+50.767 million)
= 4588 million / 6250.767 million
= $0.73
The second option , that is to acquire the firm that already exist the technology has lesser impact on EPS, but it is not the cheaper way.
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