Question

Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $35 per share) at the time he started working for Cutter Corporation three years ago. Cutter’s stock price was $35 per share. Yost exercises all of his options when the share price is $70 per share. Two years after acquiring the shares, he sold them at $107 per share. (Input all amounts as positive values. Leave no answer blank. Enter zero if applicable.)

a. What are Yost’s amount of income/gain recognized and amount of taxes payable on the grant date, exercise date, and sale date, assuming his ordinary marginal rate is 35 percent and his long-term capital gains rate is 15 percent?

Answer is complete but not entirely correct.

	Income Amount Taxes Due Grant date Exercise date Sale date

b. What are Cutter Corporation’s tax consequences (amount of deduction and tax savings from deduction) on the grant date, the exercise date, and the date Yost sells the shares, assuming its marginal tax rate is 21 percent?

	Amount of Deduction Tax Savings Grant date Exercise date Sale date

c. Assume that Yost is "cash poor" and needs to engage in a same-day sale in order to buy his shares. Due to his belief that the stock price is going to increase significantly, he wants to maintain as many shares as possible. How many shares must he sell in order to cover his purchase price and taxes payable on the exercise?

	Number of shares to be sold

d. Assume that Yost’s options were exercisable at $40 and expired after five years. If the stock only reached $38 during its high point during the five-year period, what are Yost’s tax consequences on the grant date, the exercise date, and the date the shares are sold, assuming his ordinary marginal rate is 35 percent and his long-term capital gains rate is 15 percent?

	Income Amount Taxes Due Grant date Exercise date Sale date

Answer 1

			W.N
	Number of shares acquired by Yosh	3000	=300*10
	Amount needed to exercise	105000	=3000*35
	Market Value of share	210000	=3000*70
	Ordinary Income	105000	=210000-105000
	Tax liability in the year of exercise	36750	=105000*35%
	Amount Realised	321000	=3000*107
	Adjusted Basis	105000	=210000-105000
	Long Term Capital Gains	216000	=321000-105000
	Tax liability in the year of sale	32400	=216000*15%
a)		Income Amount	Taxes Due
	Grant Date	0	0
	Exercise Date	105000	36750
	Sale Date	216000	32400
b)		Amount od Deduction	Tax Savings
	Grant Date	0	0
	Exercise Date	105000	22050
	Sale Date	0	0
c)	Number of shares to be sold	Cash needed for same day sale/ Market Price
	Cash needed for same day sale	Cash needed for exercise + Tax due
		141750	=105000+36750
	Number of shares to be sold	2025	=141750/70
d)	The market price of $70 exceeds the strike price $38. Y will not exercise the option. Hence, the the options will expire unexercised. No tax consequence for Yosh and Cutter Corporation.