Seagate Corporation has 6.78 billion shares outstanding and a share price of \($17.61.\) Seagate is considering developing a new networking product in house at a cost of \($496\) million.

Alternatively, Seagate can acquire a firm that already has the technology for \($898\) million worth

(at the current price) of Seagate stock. Suppose that absent the expense of the new technology, Seagate will have EPS of \($0.75.

a.\) Suppose Seagate develops the product in house. What impact would the development cost have on Seagate’s EPS? Assume all costs are incurred this year and are treated as an R&D expense, Seagate’s tax rate is 35%, and the number of shares outstanding is unchanged.

b. Suppose Seagate does not develop the product in house but instead acquires the technology.

What effect would the acquisition have on Seagate’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.