1. Your employer has awarded you 3,000 shares of SARs with a strike price of $20 per share. When SARs are exercised, the company converts the gain and compensates the employee with shares of company stock. The SARs have a five-year graduated and equal vesting schedule and a ten-year term. On the third anniversary of the grant, the market price is $25 per share and you decide to exercise your SARs. (a) Briefly explain the tax consequences, if any, of your exercise. (b) Briefly explain how you would calculate the spread owed to you on exercise. (c) Briefly explain how you would calculate the number of shares you would receive.
3. You have received a grant of 2,000 NQSO shares. They vest on a graduated basis over a five-year period. The strike price was $10 per share. It is now three years since the grant and the current price is $20 per share. You decide to exercise on a cashless basis. (a) How many shares can you exercise? (b) What will be your pretax gain on the exercise? (c) How will the options be taxed? (d) Assume the price has increased only $0.50 since the grant. What financial reason would there be to exercise now?