Bill Was Awarded 3,000 Options; Each Option Allows Him to Purchase

question 31

Essay

Bill was awarded 3,000 options; each option allows him to purchase one share of BK's stock for $15. The stock is currently selling for $12 per share. Three years later, Bill exercises the options when the stock's selling price is $21 per share. Two years later, Bill sells the stock for $20 per share. What are Bill's and BK's tax consequences for these transactions if the options are:
a. Incentive stock options
b. Nonqualified stock options

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Definitions:

Opportunity Cost

is the value of the best alternative forgone when a choice is made between competing options, representing the trade-offs associated with every decision.

Revenue Potential

The maximum amount of income that could be generated from a particular market or product, under ideal conditions.

Utility

A measure of satisfaction or happiness that a person derives from consuming goods and services.

Marginal Utility

The additional satisfaction or utility a consumer receives from consuming one more unit of a good or service.