Required: a. What is the after-tax value of each compensation package for year 1? b. If Pratt's sole consideration is maximizing after-tax value for year 1, which scheme should he select?
Required: a. What is the after-tax value of each compensation package for year 1? b. If Pratt's sole consideration is maximizing after-tax value for year 1, which scheme should he select?
Chapter5: Gross Income: Exclusions
Section: Chapter Questions
Problem 3BCRQ
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![Required information
[The following Information applies to the questions displayed below.]
Pratt is ready to graduate and leave College Park. His future employer (Ferndale Corporation) offers the following four
compensation packages from which Pratt may choose. Pratt will start working for Ferndale on January 1, year 1.
Benefit Description
Salary
Health insurance
Restricted stock
NQOS
Option 1
$ 56,000
No coverage
Option 2
$ 55,000
$ 5,200
B
H
Option 3
$ 50,000
$ 5,200
1,000 shares
В
Option 4
$ 50,000
$ 5,200
180 options
Assume that the restricted stock is 1,000 shares that trade at $5 per share on the grant date (January 1, year 1); shares are
expected to be worth $10 per share on the vesting date at the end of year 1; and no 83(b) election is made. Assume that
the NQOS (100 options) each allows the employee to purchase 10 shares at $5 exercise price. The stock trades at $5 per
share on the grant date (January 1, year 1) and is expected to be worth $10 per share on the vesting date at the end of
year 1, and the options are exercised and sold at the end of the year. Also assume that Pratt spends on average $3,300 on
health-related costs that will be covered by Insurance if he had coverage or is an after-tax expense If he isn't covered by
Insurance (treat this as a cash outflow). Assume that Pratt's marginal tax rate is 35 percent. (Ignore FICA taxes and time
value of money considerations).
Required:
a. What is the after-tax value of each compensation package for year 1?
b. If Pratt's sole consideration is maximizing after-tax value for year 1, which scheme should he select?
Complete this question by entering your answers in the tabs below.
Required A
Required 8
What is the after-tax value of each compensation package for year 17
Note: Leave no answers blank. Enter zero if applicable.
Description
Salary
NQOs
Taxable Total
Tax Rate
Tax Paid
Net cash received at exercise
After-tax cash value
Health care expenses
After-tax value
Option 1
Option 2
Option 3
Option 4
S
0
0
$
0
S
0
35%
35%
35%
35%
<Required A
Required B >](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F98a95248-6313-4124-8c48-8cf374831d55%2Ff381760f-a5c3-4c18-96f8-0ea987abb7dd%2Feuu67bm_processed.png&w=3840&q=75)
Transcribed Image Text:Required information
[The following Information applies to the questions displayed below.]
Pratt is ready to graduate and leave College Park. His future employer (Ferndale Corporation) offers the following four
compensation packages from which Pratt may choose. Pratt will start working for Ferndale on January 1, year 1.
Benefit Description
Salary
Health insurance
Restricted stock
NQOS
Option 1
$ 56,000
No coverage
Option 2
$ 55,000
$ 5,200
B
H
Option 3
$ 50,000
$ 5,200
1,000 shares
В
Option 4
$ 50,000
$ 5,200
180 options
Assume that the restricted stock is 1,000 shares that trade at $5 per share on the grant date (January 1, year 1); shares are
expected to be worth $10 per share on the vesting date at the end of year 1; and no 83(b) election is made. Assume that
the NQOS (100 options) each allows the employee to purchase 10 shares at $5 exercise price. The stock trades at $5 per
share on the grant date (January 1, year 1) and is expected to be worth $10 per share on the vesting date at the end of
year 1, and the options are exercised and sold at the end of the year. Also assume that Pratt spends on average $3,300 on
health-related costs that will be covered by Insurance if he had coverage or is an after-tax expense If he isn't covered by
Insurance (treat this as a cash outflow). Assume that Pratt's marginal tax rate is 35 percent. (Ignore FICA taxes and time
value of money considerations).
Required:
a. What is the after-tax value of each compensation package for year 1?
b. If Pratt's sole consideration is maximizing after-tax value for year 1, which scheme should he select?
Complete this question by entering your answers in the tabs below.
Required A
Required 8
What is the after-tax value of each compensation package for year 17
Note: Leave no answers blank. Enter zero if applicable.
Description
Salary
NQOs
Taxable Total
Tax Rate
Tax Paid
Net cash received at exercise
After-tax cash value
Health care expenses
After-tax value
Option 1
Option 2
Option 3
Option 4
S
0
0
$
0
S
0
35%
35%
35%
35%
<Required A
Required B >
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