On January 1, year 1, Tyra started working for Hatch Corporation. New employees must choose immediately between receiving seven NQOs (each NQO provides the right to purchase for $5 per share 10 shares of Hatch stock) or 50 restricted shares. Hatch’s stock price is $5 on Tyra’s start date. Either form of equity-based compensation will vest in two years. Tyra believes that the stock will be worth $15 per share in two years and $25 in four years when she will sell the stock. Tyra’s marginal tax rate is 30 percent and her longterm capital gains rate is 15 percent. Assuming that Tyra’s price predictions are correct, answer the following questions (ignore present value, use nominal dollars):

a) What are the cash-flow effects to Tyra in the year she receives the options, the year the options vest and she exercises the options, and in the year she sells the stock if she chooses the NQOs?

b) What are the cash-flow effects to Tyra in the year she receives the restricted stock, in the year the stock vests, and in the year she sells the stock if Tyra chooses the restricted stock?

c) What are the cash-flow effects to Tyra in the year she receives the restricted stock, the year the stock vests, and the year she sells the stock if she makes an §83

(b) election?

d) What recommendation would you give Tyra? Explain.