1.

Jane receives options to purchase 10,000 shares of the company's stock at $35 a share beginning in 2 years and ending in 5 years. The stock was at $30 a share on the grant date.

a. Assuming Jane can work smart and hard and can contribute to raising the price of the stock to $50 a share in 3 years when she exercises her option, how much will she receive in addition to her regular salary.

b. Comment on why stock options can be an important part of a compensation package for key employees.

2.

Mary and Pete purchased a home, paying $200,000 in cash from savings and borrowing $500,000 in a fixed-rate 30-year loan. The lender charged 1 point as a origination fee, 1 point for surveying, notary fees, appraisal, etc., and offered to give them an interest rate that was 1/4% better if they would pay two points up front.

1. How much can they deduct for the points in the year of acquisition?

2. How much must they add to the basis of the home for the points instead of having a current deduction?

3. This is Mary and Pete's starter home, and they plan to stay in it for around 3-4 years. Please advise them regarding whether to accept a lower interest rate in exchange for paying the points up front.

THANK YOU!!!