Question

Quisco Systems has 6.7 billion shares outstanding and a share price of $ 17.33. Quisco is considering developing a new networking product in house at a cost of $ 505 million.​ Alternatively, Quisco can acquire a firm that already has the technology for $ 967 million worth​ (at the current​ price) of Quisco stock. Suppose that absent the expense of the new​ technology, Quisco will have EPS of $ 0.75. a. Suppose Quisco develops the product in house. What impact would the development cost have on​ Quisco's EPS

Answer 1

EPS will decrease from $0.75 to $0.70 (a 5¢ decrease per stock)

Step-by-step explanation:

some information was missing, so I looked it up:

current tax rate = 35%

6.7 billion shares outstanding and a share price of $17.33, current EPS $0.75, total current earnings = 6,700,000,000 x $0.75 = $5,025 million

in house development = $505 million will reduce net earnings by $505 x 65% = $328.25 million

this R&D expense will reduce EPS by $328,250,000 / 6,700,000,000 = $0.04899 per stock ≈ $0.05 per stock

EPS = $0.75 - $0.05 = $0.70