nonqualifed_stock_options_solution - Topic Nonqualified...

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Topic: Nonqualified stock options 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. They would like to grant 1,000 options to each of their key executives. The option price would be set at $8 per share. The options must be exercised within five years. For a typical employee, they expect that the options would be exercised just before they expire & that they would be sold two years later (assume the employee is not liable for any AMT). 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. Here is a time line indicating the projected stock price at the end of each year. fair value $10.00 $11.00 $12.10 $13.31 $14.64 $16.11 $17.72 $19.49 19x1 19x2 19x3 19x4 19x5 19x6 19x7 Time value of money factors i=10%; n=? PV of $1 factor 2 0.826 5 0.621 7 0.513 Assume that the fair value of the stock = projected stock price, the “typical” employee
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This note was uploaded on 09/09/2011 for the course TAX 6845 taught by Professor Kelliher,c during the Fall '08 term at University of Central Florida.

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nonqualifed_stock_options_solution - Topic Nonqualified...

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