ABC, Inc. wishes to provide stock options its CEO, Joe. In order to make ABC indifferent between ISOs and NQOs, assume that ABC grants some number of ISOs (or NQOs) such that the present value (as of the grant date) of ABC's expected after-tax cost is equivalent to $20,000.

ABC discounts after-tax cash flows at 6%. The following timeline indicates the duration between key events and expected future stock values at those dates.

Grant Date

Exercise Date

Sale Date

That is, the stock is worth $5 per share at the grant date. The exercise price is also $5. The stock is expected to be worth $10.00 one year later when the options are exercised and $12.00 two years later when Joe will sell the stock.(a)

How many ISOs or NQOs would ABC grant if to = 10%? What if te = 35%?

Numbers of options granted if

1 = 10%

1 = 35%

ISOs

NOOsSuppose Joe faces tax rates of 1p 40% and log 20%. His after-tax discount rate is 6%.

Using the numbers of granted options that you computed above, what is the present value of Joe's after-tax cash flows over the two year period?

PV of employee's ATCF if_

c = 10%

c=35%

ISOs

NOOs

(c) Explain how your answers to parts (a) and (b) relate to multilateral tax planning.

ABC, Inc. wishes to provide stock options its CEO, Joe. In order to make ABC indifferent between ISOs and NQOs, assume that ABC grants some number of ISOs (or NQOs) such that the present value (as of the grant date) of ABC's expected after-tax cost is equivalent to $20,000. ABC discounts after-tax cash flows at 6%. The following timeline indicates the duration between key events and expected future stock values at those dates. That is, the stock is worth $5 per share at the grant date. The exercise price is also $5. The stock is expected to be worth $10.00 one year later when the options are exercised and $12.00 two years later when Joe will sell the stock. (a) How many ISOs or NQOs would ABC grant if tc=10% ? What if tc=35% ? (b) Suppose Joe faces tax rates of tp=40% and tcg=20%. His after-tax discount rate is 6%. Using the numbers of granted options that you computed above, what is the present value of Joe's after-tax cash flows over the two year period? c) Explain how your answers to parts (a) and (b) relate to multilateral tax planning