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

question 45

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 statement best describes Johnny's tax situation pursuant to these gains?

• 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:

Capital

Represents resources like funds, equipment, and properties used in the production of goods and services, contributing to the wealth of businesses or economies.

Comparative Advantage

is the ability of an individual or country to produce a good or service at a lower opportunity cost than competitors.

Opportunity Cost

The cost of what is foregone in order to pursue a certain action, essentially the benefits you could have received by taking an alternative action.

Consumer Sovereignty

The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).