Question

Haven received 200 NQOs (each option gives him the right to purchase 20 shares of Barlow Corporation stock for $7 per share) at the time he started working for Barlow Corporation three years ago when its stock price was $7 per share. Now that Barlow’s share price is $50 per share, he intends to exercise all of his options. After acquiring the 4,000 Barlow shares with his options, he intends to hold the shares for more than one year and then sell the shares when the price reaches $75 per share. (Leave no answer blank. Enter zero if applicable. Input all amounts as positive values.)

a. What are Haven's taxes due on the grant date, exercise date, and sale date, assuming his ordinary marginal rate is 32 percent and his long-term capital gains rate is 15 percent?

b. What are the tax consequences for Barlow Corporation resulting from Haven’s option exercise if Barlow’s marginal tax rate is 21 percent? How would it change if Barlow's marginal rate were 0 percent?

Date	Amount
Tax Benefit on grant date
Tax Benefit in year of exercise
Tax Benefit in year of sale
Tax Benefit when tax rate is 0%

Answer 1

Point	Particular	Amount	Hint
1	Share Acquired	4000	200x20
2	Strike Price	7
3	Cash needed To Excercise	28000	4000x7
4	Market Price	50
5	Market Share Valuation	200000	4000x50
6	ordinary Income	172000	4000x(50-7)
7	Margin Rate of tax	32%
8	Tax due in year of exercise	55040
	He also recognizes $100,000 of capital gain and pays tax of $15,000 in the year of sale, the calculations are as follows:
9	Share Acquired	4000	200x20
10	Market Price	75
11	Market Share Valuation	300000	4000x75
12	Market Share Valuation	200000	5point
13	ordinary Income	100000
14	Margin Rate of tax	15%
15	Tax due in year of sale	15000
	Barlow has no tax consequences on the grant date or sale date. Barlow does receive a deduction equal to the $172,000 (point (6) above) bargain element on the date Haven exercises the options
1	ordinary Income	172000	4000x(50-7)
2	Margin Rate of tax	21%
3	Tax Benifit in year of exercise	36120
	Date	Amount
	Tax Benefit on grant date	55040
	Tax Benefit in year of exercise	36120
	Tax Benefit in year of sale	15000
	Tax Benefit when tax rate is 0%	172000