Questions a- d require detailed calculations and an explanation that answers the question and describes the calculation, chart, formula, table or graph. You must draft your calculations in the format provided in the text and then add your calculations in additional columns. This Excel document must be submitted along with your MS Word document for maximum credit. You are required to paste your Excel calculations into your Word document along with your analysis narrative. Each answer and calculation should be accompanied by a written explanation approximately a paragraph in length. The final section is your analysis of the entire case and the additional questions posed. This section should be a minimum of one page in length and include in text citations from the textbook, additional course readings and other reliable tax sources. It may include calculations or an explanation of how the previous calculations provide support for your answer. FACTS: In December 1992, Michael Eisner and the late Frank Wells of Walt Disney exercised a large number of stock options. The facts are summarized here. Options Granted Previously Exercised Exercised Expiration Date Exercise Price 11/30/92*** Grant Date Eisner 8.16 m 3.16 m 5.00 m* 1984 1994 $ 3.59 6.00 m 1989 1999 $17.14 2.00 m 1989 1999 $19.64 Wells 7.36 m 5.72 m 1.64 m** 1984 1994 $3.59 2.25 m 1989 1999 $17.14 0.75 m 1989 1999 $19.64 *Of the shares acquired, 3.45 million were sold immediately. **All of the shares acquired were sold immediately. **Goldman Sachs executed these sales at $40 per share. In 1984, Michael Eisner became chairman of Walt Disney and Frank Wells became president. In late 1992, the options originally granted in 1984 were exercised when the stock price was $40 per share. Both Eisner and Wells were subject to the top marginal tax rate in 1992, which was 31%. Assume that both had salaries in excess of $1 million. In late 1992 there was a high probability that President Clinton's tax act would be passed, effective for 1993, and that the top tax rate for individuals would increase to 39.6%, the corporate rate would increase to 35%, and deductions for executive compensation in excess of $1 million would be disallowed. QUESTIONS: Provide detailed calculations in Excel and in your MS Word document, which also includes an explanation with your answer to the question. a. Ignoring present-value considerations, how much did Eisner and Wells together personally save in taxes by exercising their options in 1992 instead of waiting until 1993 or 1994? b. Michael Eisner exercised 5 million options and immediately sold 3,450,000 of the shares. What were the cash flow consequences to Eisner of these two transactions, including taxes? c. Eisner told the Wall Street Journal he had to exercise the options in 1992 to avoid Disney incurring a substantial additional tax liability. Consider the claim that the early exercise saved Disney shareholders roughly $90 million in corporate income taxes. Assume that the corporation could not deduct any compensation paid in 1993 over $1 million. d. Recompute your answer to (c) using the actual law as enacted, which has two provisions relevant for this problem. The first is that the $1 million disallowance did not take effect until 1994. The second is that transitional rules would have grandfathered these options and made the expenses fully deductible. ANALYSIS: Analyze Eisner, Wells and Disney's actions and the timing of the exercise and the proposed tax law changes. If early exercise was such a good deal for Disney, why didn't Eisner and Wells exercise all their options instead of just the options granted in 1984? Discuss your analysis. Consider whether your conclusion sounds reasonable. Support your answers with a detailed explanation that includes in text citations from the textbook, additional course readings or other reliable tax sources. Questions a- d require detailed calculations and an explanation that answers the question and describes the calculation, chart, formula, table or graph. You must draft your calculations in the format provided in the text and then add your calculations in additional columns. This Excel document must be submitted along with your MS Word document for maximum credit. You are required to paste your Excel calculations into your Word document along with your analysis narrative. Each answer and calculation should be accompanied by a written explanation approximately a paragraph in length. The final section is your analysis of the entire case and the additional questions posed. This section should be a minimum of one page in length and include in text citations from the textbook, additional course readings and other reliable tax sources. It may include calculations or an explanation of how the previous calculations provide support for your answer. FACTS: In December 1992, Michael Eisner and the late Frank Wells of Walt Disney exercised a large number of stock options. The facts are summarized here. Options Granted Previously Exercised Exercised Expiration Date Exercise Price 11/30/92*** Grant Date Eisner 8.16 m 3.16 m 5.00 m* 1984 1994 $ 3.59 6.00 m 1989 1999 $17.14 2.00 m 1989 1999 $19.64 Wells 7.36 m 5.72 m 1.64 m** 1984 1994 $3.59 2.25 m 1989 1999 $17.14 0.75 m 1989 1999 $19.64 *Of the shares acquired, 3.45 million were sold immediately. **All of the shares acquired were sold immediately. **Goldman Sachs executed these sales at $40 per share. In 1984, Michael Eisner became chairman of Walt Disney and Frank Wells became president. In late 1992, the options originally granted in 1984 were exercised when the stock price was $40 per share. Both Eisner and Wells were subject to the top marginal tax rate in 1992, which was 31%. Assume that both had salaries in excess of $1 million. In late 1992 there was a high probability that President Clinton's tax act would be passed, effective for 1993, and that the top tax rate for individuals would increase to 39.6%, the corporate rate would increase to 35%, and deductions for executive compensation in excess of $1 million would be disallowed. QUESTIONS: Provide detailed calculations in Excel and in your MS Word document, which also includes an explanation with your answer to the question. a. Ignoring present-value considerations, how much did Eisner and Wells together personally save in taxes by exercising their options in 1992 instead of waiting until 1993 or 1994? b. Michael Eisner exercised 5 million options and immediately sold 3,450,000 of the shares. What were the cash flow consequences to Eisner of these two transactions, including taxes? c. Eisner told the Wall Street Journal he had to exercise the options in 1992 to avoid Disney incurring a substantial additional tax liability. Consider the claim that the early exercise saved Disney shareholders roughly $90 million in corporate income taxes. Assume that the corporation could not deduct any compensation paid in 1993 over $1 million. d. Recompute your answer to (c) using the actual law as enacted, which has two provisions relevant for this problem. The first is that the $1 million disallowance did not take effect until 1994. The second is that transitional rules would have grandfathered these options and made the expenses fully deductible. ANALYSIS: Analyze Eisner, Wells and Disney's actions and the timing of the exercise and the proposed tax law changes. If early exercise was such a good deal for Disney, why didn't Eisner and Wells exercise all their options instead of just the options granted in 1984? Discuss your analysis. Consider whether your conclusion sounds reasonable. Support your answers with a detailed explanation that includes in text citations from the textbook, additional course readings or other reliable tax sources