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 $ 66,000 No coverage Option 2 $ 55,000 $5,200 Option 3 $ 50,000 $ 5,200 1,000 shares Option 4 $ 50,000 $ 5,200 100 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). equired: What is the after-tax value of each compensation package for year 1? 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 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 $ 66,000 No coverage Option 2 $ 55,000 $5,200 Option 3 $ 50,000 $ 5,200 1,000 shares Option 4 $ 50,000 $ 5,200 100 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). equired: What is the after-tax value of each compensation package for year 1? 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Do not provide solution in imge format. and also do not provide plagarised content otherwise i dislike.
![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
$ 66,000
No coverage
Option 2
$ 55,000
Option 3
$ 50,000
Option 4
$ 50,000
$ 5,200
Ө
Ө
$ 5,200
1,000 shares
$ 5,200
в
100 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 B
What is the after-tax value of each compensation package for year 1?
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
$
0
$
0
$
0
$
0
35%
35%
35%
35%
< Required A
Required B >](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7325650c-943a-4d2d-aba2-a17243efaaf4%2Ff857bfdc-1dee-4300-a04b-a35d49367348%2Fu73y4ze_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
$ 66,000
No coverage
Option 2
$ 55,000
Option 3
$ 50,000
Option 4
$ 50,000
$ 5,200
Ө
Ө
$ 5,200
1,000 shares
$ 5,200
в
100 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 B
What is the after-tax value of each compensation package for year 1?
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
$
0
$
0
$
0
$
0
35%
35%
35%
35%
< Required A
Required B >
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