e following questions to answer Q5 to 07. Hamstrung Electronics Inc. (HEI) has 6 billion shares outstanding and a share price of $15. HEI is considering developing a new product in house at a cost of $500 million. Alternatively, HEI can acquire a firm that already has the technology for $450 million worth (at the current price) of HEI's stock. Suppose that absent the expense of the new technology, HEI will have EPS of 5 0.78. 5. Suppose HEI develops the product in house. What impact would the development cost have on HEI's EPS? Assume all costs are incurred this year and are treated as an R&D expense, HEI's tax rate is 25% and the number of shares outstanding is unchanged. A. EPS will increase by $0.06. B EPS will decrease by $0.06. C. EPS will increase by $0.16. D. EPS will decrease by $0.16. 6. Suppose HEI does not develop the product in house but instead acquires
Use the following questions to answer Q5 to 07.
Hamstrung Electronics Inc. (HEI) has 6 billion shares outstanding and a share price of $15. HEI is considering developing a new product in house at a cost of $500 million. Alternatively, HEI can acquire a firm that already has the technology for $450 million worth (at the current price) of HEI's stock. Suppose that absent the expense of the new technology, HEI will have EPS of 5 0.78.
5. Suppose HEI develops the product in house. What impact would the development cost have on HEI's EPS? Assume all costs are incurred this year and are treated as an R&D expense, HEI's tax rate is 25% and the number of shares outstanding is unchanged.
A. EPS will increase by $0.06.
B EPS will decrease by $0.06.
C. EPS will increase by $0.16.
D. EPS will decrease by $0.16.
6. Suppose HEI does not develop the product in house but instead acquires the technology. What effect would the acquisition have on HET'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 in EPS is due to the change in the number of shares outstanding.).
A. EPS will increase by 50.004
B. EPS will decrease by 50.004.
C. EPS will increase by $0.114.
D. EPS will decrease by $0.114.
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