Quisco Systems has 6.5 million shares outstanding and a share price of $18. Quisco is considering developing a new networking product in house at a cost of $500million. Alternatively Quisco can acquire a firm that alreadyhas the technology for $900 million worth (at the current price) of Quisco stock. Suppose that absent the expense of the newtechnology, Quisco will have an EPS of $0.80.
A. Suppose Quisco develops theproduct in house. What impact would the development cost have on Quisco's EPS. Assume all costs are are incurred this year. andare treated as an R&D expense. Quisco's tax rate is35%, and the number of shares outstanding is unchanged.
B. Suppose Quisco does not developthe product in house but instead acquire the technology. What effect would the acquisition have on Quisco's EPS thisyear?
C. Which method of acquiring the technology has a smaller impact on earning? Is this method cheaper? Explain.
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