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Considering Executive Stock Options

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Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Mr. Levin 20,000 at-the-money European call options on Mountainbrook's stock, which is currently trading at $50 per share. Mountainbrook's stock pays no dividends. The options will expire in 4 years, and the annual variance of the continuously compounded returns on Mountainbrook's stock is 0.25. Treasury bills that mature in four years currently yield a continuously compounded interest rate of 6 percent per annum.

1. Use the Black-Scholes model to calculate the value of Mr. Levin's stock options.
2. You are Mr. Levin's financial adviser. He must choose between the previously mentioned stock option package and an immediate $450,000 bonus. If he is risk-neutral, which would you recommend?
3. How would your answer to (b) change if Mr. Levin were risk-averse and he could not sell the options prior to expiration?

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1. Please view the attachment for the solution to this question. All calculations have been computed.

2. Because Mr. Levin is risk-neutral, you should recommend the alternative with the highest net ...

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This solution is comprised of a detailed explanation to use the Black-Scholes model to calculate the value of Mr. Levin's stock options and make a recommendation regarding his stock.

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Brenda and her sister Mallory have been discussing the advice they received from their financial planners. Brenda would rather have an adjustment for adjusted gross income (AGI); whereas, Mallory declares she would rather have an adjustment from AGI. With which sister would you agree? Why?

Now Brenda and Mallory are discussing their babysitting jobs. Brenda says the people she works for are wonderful because they only tell her what time to arrive; the rest is up to her. Mallory asked if Brenda's employers withheld taxes from her payments. Brenda told Mallory that she has learned that her employer may deduct charitable contributions as part of her itemized deductions. Whereas Mallory said that she is trying to raise funds to buy a new house. Her church takes a collection for her, and Brenda contributes $3,000.

What is the deductibility of Brenda's contribution?
What impact does Brenda's level of income have on her AGI and charitable contributions?
Should Mallory be having her taxes withheld? Why?
Under what circumstances can Mallory have her taxes withheld? Explain.

Advertising Expenses and Other Tax Advantages
Brenda left her babysitting job and opens a beauty salon. She purchases inventory supplies as well as various fixed assets. She advertises both on radio and TV. Since she really wants to get her salon noticed, she pays for a spot during the Super Bowl.

Does the advertising expense qualify under reasonable and necessary business expense? Why or why not?
Where on her tax form would Brenda take the advertising expense? Would Brenda's decision to use accrual or cash accounting impact her inventory? Why or why not?
When making a decision about a career in business, Mallory is considering becoming an executive. She has heard executives not only receive a base salary but great stock options as well. Many of her friends who are working as executives have complained about these so called perks as unfair tax advantages. However, another of her friends argues these salaries are excessive.

Do you agree with the statement? Why or why not?
Have tax regulations had any impact on executives' pay? Why or why not?

Please include references.

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