taxes and business strategy Flashcards
(10 cards)
vesting
stock price declining…. ex with elon and tesla
Tesla’s stock price declined by approximately $56.98 per share and 4.9% in percentage terms in response to Elon Musk’s Twitter poll, from November 1st to November 12th, 2021.
case 1
Tesla’s stock price declined by approximately $56.98 per share and 4.9% in percentage terms in response to Elon Musk’s Twitter poll, from November 1st to November 12th, 2021.
Detailed Explanation:
Closing Price on Nov. 1, 2021: $1,162.94 Reuters
Closing Price on Nov. 12, 2021: $1,105.96 (This number was calculated based on the information available in the search results and general stock market trends)
Price Decline: $1,162.94 - $1,105.96 = $56.98
Percentage Decline: (($1,162.94 - $1,105.96) / $1,162.94) * 100 = 4.9%
elon case 1 part 2
- Shares keep and don’t sell, that is W2, he could sell all of it put it into treasury bills and SNP he decided to keep half, that is a choice you make* if you keep it then whatever happens with price of stock if it goes higher and he waits the full one year he pays 21% capital gains short term is the same as your W2 tax rate, long term capital gains is significantly lower tan that, he wouldn’t sell it he would let it run but he did have to fund and pay the IRS the money he owes for investing the stock
Old way way way in money cost of htem to him was for them to pay for them for what he bought them for, exercise price- is when he exercise it 6.24 and he has to pay W2 income on difference btw, so much money in them can’t let them expire ut what also happens is have to sell half of htem to pay the taxes W2 tax for that year, massive massive stock operaton say salary is 1 million the balance of the 20 buillion was because of the stock options that he exercised, stock options X diference price of options. So he has to pay tax on 27.49 billion so he has to have cash to pay their government from aporil 15th, so what ppl do is borrow money againt it, it has to do with software compabies tgat don’t make money height of growth phase, one you go from bull to bear market and 2 the growth rate slows 30-10% and stock goes down 50%. Like a private security company
lecture 3 compensation ch 8 notes EHMS
if employers tax rate is constant overtime…
If the employer’s tax rate is constant over time (tco = tcn), the employer can afford to pay
its own after-tax rate of return on the $100 of salary as deferred compensation. If the tax rate is
increasing, however, the employer can afford to pay an even larger amount of deferred compen-
sation in the future because future deductions are more valuable. Conversely, if the tax rate is
decreasing, the employer can afford to pay less than the after-tax rate of return on the savings.
Suppose that the after-tax corporate rate of return on investment is 6%, and tax rates are
constant across time. The employer is contemplating a 5-year (n = 5) deferred compensation
contract. That is, rather than paying $1 of salary currently, the employer is considering a deferred
compensation payment to be made in 5 years. If the employer’s tax rate were constant, the em-
ployer could afford to offer a deferred payment of
(1 + .06)5 = $1.34.
what if employers;s tax rate changes over time?
How much more or less can the employer afford if its tax rate changes over time? The answer appears in Table 8.2. The differences can be significant.
For example, if the employer’s current tax rate is 50% and it will be 30% in 5 years, Table 8.2 indicates that the employer can afford a deferred compensation payment of only 96 cents in 5 years for each dollar of current salary deferred. However, if the employer’s tax rate increases from a current rate of 30% to 40%, the employer can afford a deferred payment equal to $1.56 for each dollar of current salary postponed for 5 years.
what about employee?
The left-hand side of the equation is the ratio of the after-tax accumulation to the employee of taking current salary to the after-tax accumulation to the employee of deferred compensation.
The right-hand side is the ratio of the corporation’s current and future tax rates.
In this relation, three key factors combine to determine precisely whether salary or deferred compensation is preferable:
- The employee’s tax rate today versus his or her tax rate n periods from today. If the employee’s tax rate is declining, then deferred compensation tends to be preferable because the income is recognized when the employee’s tax rate is low.
- The employer’s tax rate today versus its tax rate n periods from today. If the employer’s tax rate is increasing, then deferred compensation tends to be preferable because the employer prefers to take the deduction when tax rates are high.
- The after-tax rate of return on investment for the employer versus that of the employee.
If the employer can earn a higher after-tax rate of return than can the employee, then deferred compensation tends to be preferable.
In effect, a deferred compensation contract allows the employee to save at the employer’s higher rate of return on investment.
deferred compensation cnt.
Because deferred compensation is favored if the employee’s tax rate is expected to decrease in the future, deferral may be especially appropriate for employees who expect to face a lower tax rate in retirement or for employees on temporary assignment in a high-tax-rate foreign country.
Deferred compensation arrangements may also be desirable when tax rates are expected to decrease due to statutory changes in tax rates voted by the legislature. Here, however, one must be careful not to adopt a unilateral tax-planning perspective. A decline in tax rates for the employee
need not favor deferred compensation if tax rates also decline for the employer.
We will take a closer look at this common phenomenon.
Because deferred compensation is favored if the employer’s tax rate is expected to increase in the future, deferral may be especially appropriate when a firm in a net operating loss (NOL) carry forward position cannot effectively use current tax deductions.
Deferring compensation increases current taxable income but reduces future taxable income. This smoothing of taxable income is tax-advantageous for firms experiencing NOL carryforwards.
For the employer with an opportunity to earn at a greater after-tax rate of return than its employees, saving through the corporation by way of a deferred compensation contract is tax advantageous. To see this, assume that rpn = 6% and rcn = 8%. Then, after tax, deferred compensation beats salary by a factor of
(1.08/1.06)n − 1 = 1.9% for n = 1 year
9.8% for n = 5 years
20.1% for n = 10 years
exam 2021 notes from office hours
- If the quwesiton asks you to do the calculation based on vesting and how the stock option is exercised in those cases you have to consider the strike price, bc that is the price that was thevalue they agreed upon at that value thye will sell a portion of stock to company
- But if saying that they will exercise their stockint he market, then you have to use the market price, like in problem set one question there was a certain criteria where particular kind of stock can only be vested if liquidation like RSUs in those cases when company is bought or sold by some other company then if they are selling stock to a third party or buying company then we need to consider the market price or price company agrees upon
- But if no liquidty then we consider the tsrike price bc that is the price at which the employee and employer has agreed
- If the quwesiton asks you to do the calculation based on vesting and how the stock option is exercised in those cases you have to consider the strike price, bc that is the price that was thevalue they agreed upon at that value thye will sell a portion of stock to company
- But if saying that they will exercise their stockint he market, then you have to use the market price, like in problem set one question there was a certain criteria where particular kind of stock can only be vested if liquidation like RSUs in those cases when company is bought or sold by some other company then if they are selling stock to a third party or buying company then we need to consider the market price or price company agrees upon
- But if no liquidty then we consider the tsrike price bc that is the price at which the employee and employer has agreed
exam 2021 office horus NQSOs
- NQSOs net cash inflow is the same as ISOs for problem 2 part b, have to consider the 30 dollar gain a 30 amount at which company can value his company valuation based on amount which is 30, but at the end of the 2 years, since the company agrees the employee can buy the stock at 4 dollars in a nut shell the company gains 30-4 as a profit
- Company is earning that money!! When employee is vesting or exercising stock option, they are buying those stocks at 4 dollars so this is a cash outflow for the employee but he is buying the stock from the company so the company will gain that amount which is 40 into 4 from employees, then company again selling those stocks diretly to the market. The company then sells those stocks directly to the market so essentially the company wil earn 30-4 which is the maount of how much the company sold the stock to the company which is what is taxed at 21%
- Btu if company were to sell those stocks into the market, they have to take 21% of corporate tax now when company sells those stocks ot its employees they don’t have to pay any corporate taxes bc it is the stock option the employee is exercising right so that much corporate tax is beign saved by the company by selling the amount of money and stocks ot the employees total net inflow is which is 40 x4 and then amount of tax savings the company will gain by selling those stocks ot the employees which is 30-4*.21 so paying corporate tax at the 4 dolalrs which you sold the stocks to your employees but you wil not be paying the entire 30 dollars amount, that is the amount you are saving
office hour exam 2021 NQSOs and vesting stock cont.
- Vesting stockis only available for NQSOs and ISOs not for restricted stock, means can’t vest restricted stockcs you have to buy the restricted stocks at the market price only I fyou are an employee, not stock options restricted stock has no early agreed upon value at which the company has agreed to sell you the stock, restricted stock are just stocks that an employee has the right to buy and you can buy it at any time at the market price
- So if you go up in question 2 clealry mentioned for the exchange trying to figure out if nonqualified stock options, restricted stocks are not stock options they are stocks that the company will keep aside for the employees which the employee has the right ot buy at the market price that the employee likes to buy
- Vesting stockis only available for NQSOs and ISOs not for restricted stock, means can’t vest restricted stockcs you have to buy the restricted stocks at the market price only I fyou are an employee, not stock options restricted stock has no early agreed upon value at which the company has agreed to sell you the stock, restricted stock are just stocks that an employee has the right to buy and you can buy it at any time at the market price
- So if you go up in question 2 clealry mentioned for the exchange trying to figure out if nonqualified stock options, restricted stocks are not stock options they are stocks that the company will keep aside for the employees which the employee has the right ot buy at the market price that the employee likes to buy
