Hazel Received 20 NQOs (Each Option Gives Her the Right

question 99

Essay

Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. If Hazel holds the shares for two years and sells them when the market price is $25, how much gain will Hazel recognize on the sale and how much tax will she pay assuming her marginal tax rate is 37 percent?

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Definitions:

Liquidity Preference Theory

A theory ofthe shape of the yield curve. The curveslopes upward because, all other thing equal, investors prefer shorter, moreliquid investments. They must therefore be induced to lend longer withhigher rates

Market Segmentation Theory

A theory of the shape of the yield curve. The debt market is segmented by term, and each segment is independent of the others. Hence, the curve slopes up or down depending on supply and demand conditions in the various market segments.

Liquidity Preference Theory

A theory suggesting that people prefer to hold their wealth in liquid form for convenience and as a precaution against uncertainty, affecting interest rates.

Yield Curve

A graphical representation of interest rates on debt for a range of maturities, often used as an indicator of economic expectations and interest rate trends.