ACC/307 ACC307 ACC 307 WEEK 9 Chapter 12 Homework

Lynette is the CEO of publicly traded TTT Corporation and earns a salary of $200,000 in the current year. Assume TTT has a 35 percent marginal tax rate.

a.

What is TTT Corporation’s after-tax cost of paying Lynette’s salary?

TTT’s after-tax cost is $130,000, calculated as follows:

Antonio received 40 ISOs (each option gives him the right to purchase 20 shares of Zorro stock for $3 per share) at the time he started working for Zorro Corporation six years ago. Zorro’s stock price was $3 per share at the time. Now that Zorro’s stock price is $50 per share, he intends to exercise all of his options and immediately sell all the shares he receives from the options exercise. (Input all amounts as positive values.)

a.

What are Antonio’s taxes due on the grant date, the exercise date, and the date the shares are sold, assuming his ordinary marginal rate is 30 percent and his long-term capital gains rate is 15 percent?(Leave no answer blank. Enter zero if applicable.)

b.

What are Zorro’s tax consequences on the grant date, the exercise date, and the date Antonio sells the shares assuming its marginal tax rate is 25 percent? (Leave no answer blank. Enter zero if applicable.)

c.

What are the cash flow effects of these transactions to Antonio, assuming his ordinary marginal rate is 25 percent and his long-term capital gains rate is 15 percent? (Leave no answer blank. Enter zero if applicable.)

d.

What are the cash flow effects to Zorro Corporation resulting from Antonio’s option exercise if Zorro’s marginal tax rate is 35 percent? (Leave no answer blank. Enter zero if applicable.)

Antonio has no tax consequences on the grant date.

Since Antonio exercises and sells the shares immediately he has a disqualifying disposition of ISOs, so they are treated like NQOs. Antonio recognized $37,600 of ordinary income and pays $11,280 in taxes, the calculations are as follows:

Because the options are treated like NQOs, Zorro has a deduction of $37,600 and tax savings of $9,400, calculated as follows:

Antonio has no cash flow consequences on the grant date.

Since Antonio exercises and sells the shares immediately he has a net cash inflow of $28,200. The disqualifying disposition of ISOs is treated like NQOs. Antonio recognized $40,000 (see line 5) of cash and he pays $2,400 (see line 3) for the stock and $9,400 (see last line) in taxes, the tax calculations are as follows:

Zorro has positive cash flow of $15,560. Because the options are treated like NQOs, Zorro has tax savings of $13,160, and $2,400 of cash proceeds from Antonio (from line 6 above) calculated as follows:

JDD Corporation provides the following benefits to its employee, Ahmed (age 47):

 Salary

$

300,000  

 Health insurance

10,000  

 Dental insurance

2,000  

 Life insurance

3,000  

 Dependent care

5,000  

 Professional dues

500  

 Personal use of company jet

200,000  

Assume the life insurance is a group-term life insurance policy that provides $200,000 of coverage for Ahmed. (Use EXHIBIT 12-10.)

a.

Assuming Ahmed is subject to a marginal tax rate of 30 percent, what is his after-tax benefit of receiving each of these benefits(ignoring FICA taxes)?

Sharmilla works for Shasta Lumber, a local lumber supplier. The company annually provides each employee with a Shasta Lumber shirt so that employees look branded and advertise for the business while wearing the shirts.

Are Shasta’s employees required to include the value of the shirts in income?

No

Jasmine works in Washington, D.C. She accepts a new position with her current firm in Los Angeles. Her employer provides the following moving benefits:

•

Temporary housing for one month—$3,000.

•

Transportation for her household goods—$4,500.

•

Flight and hotel for a house-hunting trip—$1,750.

•

Flights to Los Angeles for her and her family—$2,000.

What amount of these benefits must Jasmine include in her gross income?