McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 43

{Planning} Pratt is ready to graduate and leave College Park.His future employer offers the following four compensation packages from which Pratt may choose.Pratt will start working for Ferndale on January 1, year 1. Assume that the restricted stock is 1,000 shares that trade at $5 per share on the grant date (January 1, year 1) and are expected to be worth $10 per share on the vesting date at the end of year 1 and that no §83(b) election is made.Assume that the NQOs (100 options that each allow the employee to purchase 10 shares at $5 exercise price).The stock trades at $5 per share on the grant date (January 1, year 1) and is expected to be worth $10 per share on the vesting date at the end of year 1 and that the options are exercised and sold at the end of the year.Also assume that Pratt spends on average $3,000 on health-related costs that would be covered by insurance if he has coverage.Assume that Pratt's marginal tax rate is 35 percent.Assume that Pratt spends $3,000 in after-tax dollars for health expenses when he doesn't have health insurance coverage (treat this as an outflow), and that there is no effect when he has health insurance coverage.a.What is the after-tax value of each compensation package for year 1?
b.If Pratt's sole consideration is maximizing after-tax value for year 1, which option should he select?