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ABC, Inc. wishes to provide stock options its CEO, Joe. In order to make ABC...

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Accounting

ABC, Inc. wishes to provide stock options its CEO, Joe. In order to make ABC indifferent between ISOs and NQOs, assume that ABC grants some number of ISOs (or NQOs) such that the present value (as of the grant date) of ABCs expected after-tax cost is equivalent to $20,000. ABC discounts after-tax cash flows at 6%. The following timeline indicates the duration between key events and expected future stock values at those dates. Grant Date Exercise Date Sale Date 1 year 1 year $5.00 $10.00 $12.00 That is, the stock is worth $5 per share at the grant date. The exercise price is also $5. The stock is expected to be worth $10.00 one year later when the options are exercised and $12.00 two years later when Joe will sell the stock. (a) How many ISOs or NQOs would ABC grant if tc = 10%? What if tc = 35%? Numbers of options granted if tc = 10% tc = 35% ISOs NQOs (b) Suppose Joe faces tax rates of tp= 40% and tcg= 20%. His after-tax discount rate is 6%. Using the numbers of granted options that you computed above, what is the present value of Joes after-tax cash flows over the two year period? PV of employees ATCF if tc = 10% tc = 35% ISOs NQOs (c) Explain how your answers to parts (a) and (b) relate to multilateral tax planning

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