Question

Your employer has awarded you 3,000 shares of SARs with a strike price of $20 per share. When SARs are exercised, the company converts the gain and compensates the employee with shares of company stock. The SARs have a five-year graduated and equal vesting schedule and a ten-year term. On the third anniversary of the grant, the market price is $25 per share and you decide to exercise your SARs. (a) Briefly explain the tax consequences, if any, of your exercise. (b) Briefly explain how you would calculate the “spread” owed to you on exercise. (c) Briefly explain how you would calculate the number of shares you would receive.

Answer 1

a)

There will be a tax deduction as a result of exercising the option and this will arise from the compensation expenses that will be incurred in the year of exercise of the SARs

b)

Briefly explain how you would calculate the “spread” owed to you on exercise.

The spread will be computed as follows assuming that employee exercises the option

Spread= [($25 - $20) x 3000

Where:

$25= market price

$20= strike price

3000 = number of shares to be exercised

(c)

Number of shares will be calculated using the above formula then divide by the strike price

Spread= [($25 - $20) x 3000=15000

Shares=15000/20=750 shares