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Sally Case Study Havard Business

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1. If we ignore tax considerations and assume that Sally is free to sell options at any time after her joins Telstar, which compensation package is worth more? If tax consideration is ignored and assume that Ms. Jameson is free to sell options at any time after her joins Telstar.
First scenario If Ms. Jameson chooses stock options, she will hold until maturity date. Cash compensation at the end of the 5th year[1] = $5,000(1+6.02%)^5 = $6,697.44 To equal $6,697.44, the stock price must increase to at least $37.23[2] at the end of the 5th year. The stock price has to be higher than $35 in order to be exercised and make a gain, otherwise she will leave it expire worthlessly. However, from Exhibit 2, Telstar stock price has …show more content…

Jameson; thus, affect her decision on choice of compensation package. 1) Taxes If Ms. Jameson chooses stock options for her compensation, she will not need to pay taxes until she actually exercises them and sells the shares. At that point, gains on the shares will be taxed at either ordinary tax rate[3] or at capital gain tax rate[4], depending on whether she has held the stock for less than or more than one year after exercising the options. If taxes are considered, the value of option after tax will decrease. In the case that Ms. Jameson holds stocks for less than 1 year, she risks to her income tax rate that could be changed at the fifth year. While there will be no risk regarding tax rate, if she hold the stocks for more than 1 year. The latter case, however, increases risk regarding the share price in the future, in which it will have an effect on her capital gain or loss. For cash compensation package, tax consideration also decreases the value. Cash bonus is taxed at ordinary tax rate, so Ms. Jameson receive $5000 x (1-0.28) = $3,600 today, and $4,450.82[5] at the next five years. However, there is a risk that Ms. Jameson’s marginal tax rate is changed. For the worst case, tax rate might reach as high as 31%, and this results in the value of $4,265.37[6] at the end of the fifth year. 2) Dividend Although Mr. Mark told that Telstar’s stock does not

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