Martin Corporation Granted an Incentive Stock Option to Employee Caroline

question 37

Multiple Choice

Martin Corporation granted an incentive stock option to employee Caroline on January 1,2012.The option price was $150,and the FMV of the Martin stock was also $150 on the grant date.The option allowed Caroline to purchase 160 shares of Martin stock.Caroline exercised the option on August 1,2016,when the stock's FMV was $250.Unless otherwise stated,assume Caroline is a qualifying employee.If Caroline sells the stock on September 5,2017,for $350 per share,she must recognize (ignore alternative minimum tax)

• A)0)No gain or loss is recognized at exercise or sale with incentive stock options.
• B)long-term capital gain of $16,000 in 2017.
• C)ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2017.
• D)long-term capital gain of $32,000 in 2017.

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Definitions:

Neglected-firm Effect

The phenomenon where lesser-known or less-followed stocks generate higher abnormal returns than their well-followed counterparts.

Excess Returns

The return on an investment that exceeds a benchmark or risk-free rate, indicating the additional compensation for taking on risk.

Passive Fixed-income Indexes

Indexes that track a set of fixed-income securities, used as benchmarks for passive bond investment strategies.

Actively Managed Bond Funds

Bond investment funds where fund managers actively make decisions on buying and selling bonds to outperform the market or reach specific investment goals.