Under a Nonqualified Stock Option (NQSO)plan Which Is Granted to Damon

question 21

Multiple Choice

Under a nonqualified stock option (NQSO) plan which is granted to Damon on March 15,2012,he may purchase 200 shares of stock from his employer at $15 per share.At that date,the option does not have a readily ascertainable fair market value.Eight months later on the date of exercise the fair market value of the stock is $20.On December 1,2014,Damon sells 100 shares for $24 each.Which of the following would be the result of these transactions on the date of exercise and the date of sale?

• A)Ordinary income of $1,000 and a long-term capital gain of $400.
• B)Ordinary income of $1,200 and a long-term capital gain of $300.
• C)Ordinary income of $2,400 and a long-term capital gain of $0.
• D)Ordinary income of $1,000 and a short-term capital gain of $400.
• E)None of these.

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Definitions:

Producer Surplus

The difference between what producers are willing to accept for a good or service versus what they actually receive, usually measured above supply curve.

Binding Price Ceiling

A government-imposed maximum price that is set below the equilibrium price, resulting in a shortage of the good or service.

Substitute

A good or service that can replace another to satisfy similar needs or desires, often leading to competition between producers.

Consumer Surplus

The divergence between what consumers are willing to pay for a product or service and the actual payment they make.