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4 votes
. In 2015 (year 0), Jessee exercised a stock option by paying \( \$ 100 \) per share for 225 shares of ABC stock. The market price at date of exercise was \( \$ 312 \) per share. In 2022, Jessee sold

2 Answers

4 votes

Final answer:

To determine the price an investor would pay for a share of stock in Babble, Inc., we need to calculate the present value of the expected future profits. Assuming a discount rate of 10%, the price per share would be $241,550.

Step-by-step explanation:

To determine the price an investor would pay for a share of stock in Babble, Inc., we need to calculate the present value of the expected future profits. We can use the present value formula with a discount rate to determine the value of each future profit, and then sum them up. The discount rate represents the investor's required rate of return.

Let's assume the discount rate is 10%. The present value of the first year's profit ($15 million) would be $15 million divided by (1 + 0.10)^1, which equals $13.64 million. Similarly, the present value of the second year's profit ($20 million) would be $20 million divided by (1 + 0.10)^2, which equals $16.53 million. Finally, the present value of the third year's profit ($25 million) would be $25 million divided by (1 + 0.10)^3, which equals $18.14 million.

To find the total present value, we add up the present values of the three profits: $13.64 million + $16.53 million + $18.14 million = $48.31 million. Since there are 200 shares, the price per share would be $48.31 million divided by 200, which equals $241,550 per share.

4 votes

The 2015 NPV of the cash flows from the exercise and sale of the nonqualified stock option is $63,296.81.

The initial cost of acquiring the 225 shares in 2015:

= 225 shares * $100/share = $22,500

The proceeds from selling the 225 shares in 2022:

= 225 shares * $480/share = $108,000

Capital Gains = Proceeds - Initial cost

= $108,000 - $22,500

= $85,500

Capital Gains Tax = Capital Gains * Capital Gains Rate

= $85,500 * 0.15

= $12,825

The net cash flows from the sale:

= Proceeds - Capital Gains Tax

= $108,000 - $12,825

= $95,175

NPV = Net Cash Flows / (1 + Discount Rate)^Number of Years

= $95,175 / (1 + 0.06)^7

= $95,175 / 1.50363025899

= 63296.8107891

= $63,296.81.

The full question is:

In 2015 (year 0), Jessee exercised a stock option by paying $100 per share for 225 shares of ABC stock. The market price at date of exercise was $312 per share. In 2022, Jessee sold the 225 shares for $480 per share. Assuming that Jessee is in the 35 percent tax bracket, has a 15 percent capital gains rate, and uses a 6 percent discount rate, compute the 2015NPV of the cash flows from the exercise and sale if the stock option was nonqualified

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