Can a firm with positive net income run out of cash

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Reference no: EM133901632

Case problem

Biotech Bhd has 6.17 billion shares outstanding and a share price of RM18.96. Biotech is considering developing a new networking product in-house at a cost of RM509 million. Alternatively, Biotech can acquire a firm that already has the technology for RM893 million worth (at the current price) of Biotech stock. Suppose that absent the expense of the new technology, Biotech will have EPS of RM0.83.

Task assigned:

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

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

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

Reference no: EM133901632

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