# (Solved Homework): Your employer has awarded you 3,000 shares of SARs with a strike price of…

Your employer has awarded you 3,000 shares of SARs with a strike price of \$20 per share. When SARs are exercised, the company converts the gain and compensates the employee with shares of company stock. The SARs have a five-year graduated and equal vesting schedule and a ten-year term. On the third anniversary of the grant, the market price is \$25 per share and you decide to exercise your SARs. (a) Briefly explain the tax consequences, if any, of your exercise. (b) Briefly explain how you would calculate the “spread” owed to you on exercise. (c) Briefly explain how you would calculate the number of shares you would receive.

You have received a grant of 2,000 NQSO shares. They vest on a graduated basis over a five-year period. The strike price was \$10 per share. It is now three years since the grant and the current price is \$20 per share. You decide to exercise on a cashless basis. (a) How many shares can you exercise? (b) What will be your “pretax” gain on the exercise? (c) How will the options be taxed? (d) Assume the price has increased only \$0.50 since the grant. What financial reason would there be to exercise now?

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A:- One can have the tax deduction by exercising the option and this will be resulted from the compensation expenses which would incur in the same year as of the SARs.

B:- Let us assume that the employee is applying the option , thus spread can eb determined as below:-

Spread= [(\$25 – \$20) x 3000

Where:

\$25= market price

\$20= strike price

3000= number of shares to be exercised

C:- With the help of the formula states in part B , the number of shares can be calculated and then dividing the result by the strike proce.

Spread= [(\$25 – \$20) x 3000=15000

Shares=15000/20=750 shares

A:- Cash receivable = (\$20-\$10) x 2000=\$20000

Shares=20000/10=2000 shares

B:- Pretax gain= (2000 x 20) – (2000 x 10) = \$20,000

C:- (\$20,000 x 35%)=\$7,000

D:- The appreciation of Dollar value with time can be seen as the main financial reason and It is clear that the value of one dollar today worth more than tomorrow. If we are getting \$0.5 value increase, then one should not wait so he must apply the right today.

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