LOP Bhd has 6.50 billion shares outstanding and a share price of RM19.00. LOP Berhad is considering developing a new networking product in-house at a cost of RM600 million. Alternatively, LOP Berhad can acquire a firm that already has the technology for RM900 million worth (at the current price) of LOP Berhad stock. Suppose that absent the expense of the new technology, LOP will have EPS of RM0.80.

Task assigned:

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

b. Suppose LOP does not develop the product in-house but instead acquires the technology. Discuss the effect would the acquisition have on LOPs 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? Critically analysis.

d. Can a firm with positive net income run out of cash? Critically evaluate.