Quisco Systems has 7,600 million shares outstanding and a share price of $18.68. Quisco is considering developing a new networking product in house at a cost of $512 million. Alternatively, Quisco can acquire a firm that already has the technology for $960 million worth (at the current price) of Quisco stock. Suppose that absent the expense of the new technology, Quisco will have EPS of $0.93.

a. Suppose Quisco develops the product in house. What impact would the development cost have on Quisco's EPS? Assume all costs are incurred this year and are treated as an R&D expense, Quisco's tax rate is 21%, and the number of shares outstanding is unchanged.

Quisco 's new EPS would be $ ______ ?

b. Suppose Quisco does not develop the product in house but instead acquires the technology. What effect would the acquisition have on Quisco'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.)

Quisco's EPS with the purchase is $_____?

c. Which method of acquiring the technology has a smaller impact on earnings? Is this method cheaper? Explain.

Developing technology in house OR Purchasing technology with stock?