Suzanne Received 20 ISOs (Each Option Gives Her the Right

question 107

Essay

Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares of stock for $12 per share)at the time she started working, when the stock price was $13 per share. Three years later, when the share price was $23 per share, she exercised all of her options. If Suzanne holds the shares for two additional years and sells them when the market price is $30, how much gain will Suzanne recognize on the sale and how much tax will she pay, assuming her marginal tax rate is 37 percent?

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Definitions:

Property Rights

Legal rights and claims governing the use, transfer, and disposal of property, which can apply to both tangible and intangible assets.

Market Failure

A situation where the free market fails to allocate resources efficiently, leading to a net social welfare loss.

Private Goods

Goods that are excludable and rival in consumption, meaning their use is limited to paying customers and one person's use of the good prevents another's use of it.

Prices

The sum of money needed to buy a product or service.