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Cammie received 100 NQOs (each option provides a right to purchase 10 shares of MNL stock for $10 per share) at the time she started working for MNL Corporation (5/1/Y1) four years ago when MNL’s stock price was $8 per share. Now that MNL’s stock price is $40 per share (8/15/Y5), she intends to exercise all of her options. After acquiring the 1,000 MNL shares with her options, she held the shares for over one year (10/1/Y6) and sold them at $60 per share.

b. What are MNL Corporation’s tax savings on the grant date (5/1/Y1), exercise date (8/15/Y5), and sale date (10/1/Y6)?

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Answer:

b. What are MNL Corporation’s tax savings on the grant date (5/1/Y1), exercise date (8/15/Y5), and sale date (10/1/Y6)?

MNL Corporation will have no tax effects on the grant date and (5/1/Y1) and the date that Cammie sold the stocks (10/1/Y6).

The only tax effect results from the exercise date (8/15/Y5). Tax savings = (total amount of stocks exercised x market price at the time) x marginal tax rate = (1,000 stocks x $40) x tax rate = $40,000 x tax rate

Since no marginal tax rate is given in the question, we can calculate it for different options:

  • if tax rate = 21%, then tax savings = $40,000 x 21% = $8,400
  • if tax rate = 35%, then tax savings = $40,000 x 35% = $14,000

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