[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 Option 1 $ 60,000 No coverage Option 2 $ 50,000 $ 5,000 Option 3 $ 45,000 $ 5,000 1,000 shares Option 4 $ 45,000 $ 5,000 NQO's 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 $3,000 on health-related costs that will be covered by insurance if he had coverage or is ar 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).
[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 Option 1 $ 60,000 No coverage Option 2 $ 50,000 $ 5,000 Option 3 $ 45,000 $ 5,000 1,000 shares Option 4 $ 45,000 $ 5,000 NQO's 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 $3,000 on health-related costs that will be covered by insurance if he had coverage or is ar 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).
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
option 4 after tax cash is incorrect
![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
Option 1
$ 60,000
No coverage
Option 2
$ 50,000
$ 5,000
Option 3
$ 45,000
$ 5,000
1,000 shares
Option 4
$ 45,000
$ 5,000
Restricted stock
NQO's
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 $3,000 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).](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F08c1435b-6640-4f4f-9ec8-aca428db714a%2Fc077433e-339a-4c56-9a5c-95d9dada0f52%2F99ohkp_processed.jpeg&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
Option 1
$ 60,000
No coverage
Option 2
$ 50,000
$ 5,000
Option 3
$ 45,000
$ 5,000
1,000 shares
Option 4
$ 45,000
$ 5,000
Restricted stock
NQO's
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 $3,000 on health-related costs that will be covered by insurance if he had coverage or is an
after-tax expense if he isn't covered by insurance (treat this as a cash outflow). Assume that Pratt's marginal tax rate
is 35 percent. (Ignore FICA taxes and time value of money considerations).
Transcribed Image Text:Salary
60,000
2$
50,000
2$
45,000
45,000
Restricted stock
2$
$
10,000
NQO's
5,000
Taxable Total
2$
60,000
$
50,000
55,000
2$
50,000
Tax Rate
35%
35%
35%
35%
Tax Paid
2$
21,000
17,500
19,250
2$
17,500
Net cash received at exercise
2$
2$
5,000 O
After-tax cash value
2$
39,000
$
32,500
2$
35,750
22,500 X
Health care expenses
3,000
After-tax value
2$
36,000
2$
32,500
2$
35,750
$
22,500 X
%24
%24
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