Employee Stock Options

Question 0

Which does employee prefer?

Answer 0

1. Calc NQSO using ordinary income rate
2. Calc PV using (exercise year, discount rate, #1)
3. Sale price - exercise price * # of options * capital gains rate
4. Calc PV (discount, sale years) * #3
5. # 2+#4
6. Now calc ISO :
7. Sale price - strike price * # of options
8. # 7 * capital gains
9. Calc PV (discount, sold years) * #7
10. NQSO - ISO
11. Ee prefers ISO bc #10 $ difference

Question 1

1. A

Under this fact pattern which type of option plan does company prefer?

Answer 1

1. Exercise - strike * # of options
2. # 1. * corp tax rate
3. Calc PV (Table 1, exercise years, discount rate)

NQSO better off by #3

Question 2

Which type should be used?

Answer 2

1. NQSO = part B - Part A
2. ISO = ISO from last problem

NQSO, lower net tax cost

Question 3

D. Which plan would you use if tax rate was going to change?

Answer 3

1. (Exercise-strike) * # of options * tax rate
2. PV calc (discount, exercise year) * #1
3. NQSO from Part B - #2
4. # 3- ISO from part B
5. NQSO better by #4