Fill out the Excel below:

Assume the following:

1. The award is tax deductible.

2. Taxes due are paid in cash immediately.

3. To avoid dilution, the company buys back shares in the market on the same date that the employee exercises the options. However, the options are still equity classified because the entity does not commit to buy back shares from the employees. It chooses to buy them back in the market at its discretion.

Inputs
Corporate tax rate		25.00%
Ordinary income tax rate for the employee		35.00%
Capital gains tax rate for the employee		20.00%
Option is granted at the beginning of Y1
Stock price on the grant date		50.00
Exercise price of options		50.00
Fair value of the option on the grant date		16.00
Vesting period of the options in years		2.00
Option is exercised in Y3
Stock price on the exercise date		150.00

 

Employee Taxable income Tax due Employer Book Income statement Revenues Compensation expense = PBT Effective tax rate = Net income Balance sheet Check Direct cash flows Receipts from customers - Operating cash flows - Financing cash flow -Net cash flows Indirect OCF Operating cash flow Check Y1 Y2 Y3 300.00 300.00 300.00 Y1 Y1 Y1 Y2 Y2 Y2 Y3 Y3 Y3 Y1 Tax Y2 Y3 Y1 Y2 Y3 #### #### #### Revenues Stock option deduction - Taxable income Employee Taxable income Tax due Employer Book Income statement Revenues Compensation expense = PBT Effective tax rate = Net income Balance sheet Check Direct cash flows Receipts from customers - Operating cash flows - Financing cash flow -Net cash flows Indirect OCF Operating cash flow Check Y1 Y2 Y3 300.00 300.00 300.00 Y1 Y1 Y1 Y2 Y2 Y2 Y3 Y3 Y3 Y1 Tax Y2 Y3 Y1 Y2 Y3 #### #### #### Revenues Stock option deduction - Taxable income