Question

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)?

Answer 1

MNL Corporation's tax savings on the grant date is zero. On the exercise date, the tax savings is $1,000, and on the sale date, the tax savings is $10,000.

Step-by-step explanation:

Tax Savings on the Grant Date (5/1/Y1):

MNL Corporation's tax savings on the grant date would be zero because there is no tax deduction available at this time.

Tax Savings on the Exercise Date (8/15/Y5):

MNL Corporation's tax savings on the exercise date would be $1,000 because each option provides a right to purchase 10 shares of MNL stock at $10 per share.

The difference between the exercise price ($10) and the fair market value on the exercise date ($40) is $30.

Multiplying this difference by the number of options (100) gives us a tax savings of $3,000.

However, there is a $2,000 limitation on the amount of tax savings that can be recognized in any one year.

Therefore, the tax savings on the exercise date would be $1,000.

Tax Savings on the Sale Date (10/1/Y6):

MNL Corporation's tax savings on the sale date would be $10,000.

This is calculated by multiplying the number of shares acquired with options (1,000) by the difference between the fair market value on the exercise date ($40) and the fair market value on the sale date ($60).

The tax savings is equal to this difference multiplied by the capital gains tax rate, which is assumed to be 20% in this case.

Therefore, the tax savings on the sale date would be $10,000.