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ESPP_solution - Topic Employee stock purchase plans(ESPPs...

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Topic: Employee stock purchase plans (ESPPs) The Horgan Corporation’s common stock is worth $10.00 per share today and is appreciating at approximately 10% per year. The company is thinking about adding a stock option component to their fringe benefit package. They are considering the pros and cons of both ISOs and NQOs to compensate their key executives. In addition, they are looking into ESPPs to offer stock to their rank-and-file workers. A “typical” employee will receive 1,000 options & the ESPPs options will be set at $8.50. The options must be exercised within two years. They expect that the “typical” rank- and-file employee will exercise the options just before they expire and they will sell the stock five years later. Both the company’s and the employee’s discount rates are 10%. The Horgan Company is in the 35% tax bracket. Their “typical” key executive is in the 33% ordinary income tax bracket while their “typical” rank-and-file worker is in the 25% tax bracket.
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