Required information [The following information applies to the questions displayed below.] Pratt is ready to graduate and leave College Park. His future employer (Ferndale Corporation) offers the following four compensation packages from which Pratt may choose. Pratt will start working for Ferndale on January 1, year Benefit Description Salary Health insurance Restricted stock Option 1 $ 60,000 No coverage Option 2 $ 50,000 $ 5,000 Option 3 $ 45,000 $ 5,000 1,000 shares Option 4 $ 45,000 $ 5,000 NQO's 100 options Assume that the restricted stock is 1,000 shares that trade at $5 per share on the grant date (January 1, year 1); shares are expected to be worth $10 per share on the vesting date at the end of year 1; and no 83(b) election is made. Assume that the NQOS (100 options) each allows the employee to purchase 10 shares at $5 exercise price. The stock trades at $5 per share on the grant date (January 1, year 1) and is expected to be worth $10 per share or the vesting date at the end of year 1, and the options are exercised and sold at the end of the year. Also assume th Pratt spends on average $3,000 on health-related costs that will be covered by insurance if he had coverage or is after-tax expense if he isn't covered by insurance (treat this as a cash outflow). Assume that Pratt's marginal tax rat is 35 percent. (Ignore FICA taxes and time value of money considerations).
Required information [The following information applies to the questions displayed below.] Pratt is ready to graduate and leave College Park. His future employer (Ferndale Corporation) offers the following four compensation packages from which Pratt may choose. Pratt will start working for Ferndale on January 1, year Benefit Description Salary Health insurance Restricted stock Option 1 $ 60,000 No coverage Option 2 $ 50,000 $ 5,000 Option 3 $ 45,000 $ 5,000 1,000 shares Option 4 $ 45,000 $ 5,000 NQO's 100 options Assume that the restricted stock is 1,000 shares that trade at $5 per share on the grant date (January 1, year 1); shares are expected to be worth $10 per share on the vesting date at the end of year 1; and no 83(b) election is made. Assume that the NQOS (100 options) each allows the employee to purchase 10 shares at $5 exercise price. The stock trades at $5 per share on the grant date (January 1, year 1) and is expected to be worth $10 per share or the vesting date at the end of year 1, and the options are exercised and sold at the end of the year. Also assume th Pratt spends on average $3,000 on health-related costs that will be covered by insurance if he had coverage or is after-tax expense if he isn't covered by insurance (treat this as a cash outflow). Assume that Pratt's marginal tax rat is 35 percent. (Ignore FICA taxes and time value of money considerations).
Chapter10: Deductions And Losses: Certain Itemized Deductions
Section: Chapter Questions
Problem 26P: LO.2 During 2019, Susan incurred and paid the following expenses for Beth (her daughter), Ed (her...
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Question
- What is the after-tax value of each compensation package for year 1?
- If Pratt’s sole consideration is maximizing after-tax value for year 1, which scheme should he select?
![Required information
[The following information applies to the questions displayed below.]
Pratt is ready to graduate and leave College Park. His future employer (Ferndale Corporation) offers the following
four compensation packages from which Pratt may choose. Pratt will start working for Ferndale on January 1, year 1.
Benefit Description
Salary
Health insurance
Option 1
$ 60,000
No coverage
Option 2
$ 50,000
$ 5,000
Option 3
$ 45,000
$ 5,000
1,000 shares
Option 4
$ 45,000
$ 5,000
Restricted stock
NQO's
100 options
Assume that the restricted stock is 1,000 shares that trade at $5 per share on the grant date (January 1, year 1);
shares are expected to be worth $10 per share on the vesting date at the end of year 1; and no 83(b) election is
made. Assume that the NQOS (100 options) each allows the employee to purchase 10 shares at $5 exercise price.
The stock trades at $5 per share on the grant date (January 1, year 1) and is expected to be worth $10 per share on
the vesting date at the end of year 1, and the options are exercised and sold at the end of the year. Also assume that
Pratt spends on average $3,000 on health-related costs that will be covered by insurance if he had coverage or is an
after-tax expense if he isn't covered by insurance (treat this as a cash outflow). Assume that Pratt's marginal tax rate
is 35 percent. (Ignore FICA taxes and time value of money considerations).](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F08c1435b-6640-4f4f-9ec8-aca428db714a%2F1b7cebe4-9ea5-41be-91ee-f1e7020d1fc5%2Fq2gixdw_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Required information
[The following information applies to the questions displayed below.]
Pratt is ready to graduate and leave College Park. His future employer (Ferndale Corporation) offers the following
four compensation packages from which Pratt may choose. Pratt will start working for Ferndale on January 1, year 1.
Benefit Description
Salary
Health insurance
Option 1
$ 60,000
No coverage
Option 2
$ 50,000
$ 5,000
Option 3
$ 45,000
$ 5,000
1,000 shares
Option 4
$ 45,000
$ 5,000
Restricted stock
NQO's
100 options
Assume that the restricted stock is 1,000 shares that trade at $5 per share on the grant date (January 1, year 1);
shares are expected to be worth $10 per share on the vesting date at the end of year 1; and no 83(b) election is
made. Assume that the NQOS (100 options) each allows the employee to purchase 10 shares at $5 exercise price.
The stock trades at $5 per share on the grant date (January 1, year 1) and is expected to be worth $10 per share on
the vesting date at the end of year 1, and the options are exercised and sold at the end of the year. Also assume that
Pratt spends on average $3,000 on health-related costs that will be covered by insurance if he had coverage or is an
after-tax expense if he isn't covered by insurance (treat this as a cash outflow). Assume that Pratt's marginal tax rate
is 35 percent. (Ignore FICA taxes and time value of money considerations).
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