Halo Software Ltd has 1,000,000 shares outstanding and a share price of $10. The company is considering developing a new operating system in-house at a cost of $200,000. Alternatively, Halo Ltd can get the product by purchasing Opsys Ltd, a company that specialises in developing that type of software. Opsys Ltd shareholders would be willing to accept $400,000 worth (at the current price) of Halo Software Ltd shares in full payment for the company. Without the expense of the new software development, Halo will have EPS of $0.50.

(a) Assume Halo develops the operating system in-house. What impact would the development cost have on Halos EPS? All costs are incurred this year and are treated as a tax-deductible R&D expense. Halos tax rate is 30%.

(b) Assume Halo chooses to acquire the new software by purchasing Opsys Ltd. What effect would this method of acquisition have on Halos EPS this year? (Acquisition expenses do not appear directly on the income statement). The firm was acquired at the beginning of the year and has no revenue or expenses of its own. The only effect on EPS is due to the number of shares outstanding.

(c) Which method of acquiring the software has the smaller impact on EPS? Is this method cheaper? Explain your answer.