Quisco Systems has 6.5 billion shares outstanding and a share price of $18. Quisco is considering developing a new networking product in house at a cost of $500 million. Alternatively. Quisco can acquire a firm that already has the technology for $900 million worth (at the current price) of Quisco stock. Suppose that absent the expense of the new technology. Quisco will have EPS of $0.80. a. Suppose Quisco develops the product in house. What impact would the development cost have on Qusico'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 base on Quisco's EPS this car?
c. Which method of acquiring the technology has a smaller impact on earnings? Is this method cheaper? Explain.