An Employer Issues Johnny 2,000 Stock Options in Recognition of a Very

question 21

Multiple Choice

An employer issues Johnny 2,000 stock options in recognition of a very good year. These particular options vest after 24 months from the date of issuance with an exercise price of $21.00 per share. After 24 months, these shares trade in the open market at $25.00 per share, and Johnny decides to exercise his 2,000 options, generating a gain of $8,000 (minus transaction fees) . Which of the following statements regarding Johnny's tax situation pursuant to these gains is true?

• A) Because these options were a bonus provided by the employer, there are no tax consequences attributable to Johnny.
• B) Because these shares are "under water," Johnny's employer is responsible for any taxes on the gains.
• C) Johnny will have to pay taxes based on the corporate tax rate.
• D) Johnny's gain will be deemed as income, but taxes will be paid at the capital gains rate.

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Definitions:

Fiscal Policies

Government policies related to taxation and spending that aim to influence the overall economy.

Short Run

A period of time during which at least one input, such as plant size, is fixed and cannot be changed.

Unemployment

The condition in which individuals who are capable of working and are seeking work are unable to find employment.

Phillips Curve

An economic theory that suggests an inverse relationship between rates of unemployment and corresponding rates of inflation.