Answer:
A. Option 1 After-tax value Compensation Package $36,000
Option 2 After-tax value Compensation Package $32,500
Option 3 After-tax value Compensation Package $35,750
Option 4 After-tax value Compensation Package $35,750
B. Option 1
Explanation:
Calculation to determine the after-tax value of each compensation package for year 1
OPTION 1 COMPENSATION PACKAGE
Salary $60,000
Add Restricted Stock$0
Taxable Total $60,000
($60,000+$0)
Tax Rate 35%
Less Tax Paid ($21,000)
($60,000*35%=$21,000)
After-tax cash value$39,000
($60,000-$21,000)
NQO’s$0
Less Health care expenses ($3,000)
After-tax value $36,000
($39,000-$3,000)
Therefore Option 1 After-tax value Compensation Package is $36,000
OPTION 2 COMPENSATION PACKAGE
Salary $50,000
Add Restricted Stock$0
Taxable Total $50,000
($50,000+$0)
Tax Rate 35%
Less Tax Paid ($17,500)
(35%*$50,000=$17,500)
After-tax cash value $32,500
($50,000-$17,500)
NQO’s$0
Less Health care expenses ($0)
After-tax value $32,500
($32,500-$0)
Therefore Option 2 After-tax value Compensation Package is $32,500
OPTION 3 COMPENSATION PACKAGE
Salary $45,000
Restricted Stock$ 10,000
Taxable Total $55,000
($45,000+$10,000)
Tax Rate 35%
Less Tax Paid ($19,250)
($35%*$55,000)
After-tax cash value$35,750
($55,000-$19,250)
NQO’s$0
Less Health care expenses ($0)
After-tax value $35,750
($35,750-$0)
Therefore Option 3 After-tax value Compensation Package is $35,750
OPTION 4 COMPENSATION PACKAGE
Salary $45,000
NQO’s $10,000
Taxable Total $55,000
($45,000+$10,000)
Tax Rate 35%
Less Tax Paid ($19,250)
($55,000*35%)
After-tax cash value $35,750
($55,000-$19,250)
Less Health care expenses ($0)
After-tax value $35,750
($35,750-$0)
Therefore Option 4 After-tax value Compensation Package is $35,750
b. Based on the above calculation assuming his sole consideration is maximizing after-tax value for year 1, the scheme that he should select is OPTION 1 with the amount of $36,000 reason been that OPTION 1 tend to maximizes after-tax value for year 1.
