Question

Part 1) A company has 100 employees who currently hold 1,000 stock options each. The exercise price is $25 per share. The options are currently “in the money.”

Calculate the maximum proceeds that the Company can receive from exercised stock options. In other words, assume that all stock options are exercised at the same point in time. Maximum $ proceeds from exercised stock options: _____________________

Part 2) A company has 3,000 convertible bonds (each has a face value of $1,000) that were issued at par with a coupon rate of 6% annual interest. Each bond can be converted to 20 shares of common stock. Assume a 30% income tax rate.

Calculate the following amounts:

Pre-tax annual interest expense ($): ______________________

After-tax annual interest expense ($): ________________________

Answer 1

Solution of part 1-:

No. of Employees = 100

No. of options held by each employee = 1,000

Total Outstanding no. of options =100,000 options

Exercise price =$ 25

Assuming options are in the money

Maximum collection proceeds = 100,000 options X $25

=$2,500,000

Solution of Part 2)

Pre-tax annual interest expense = 3,000 bonds X Face Value $1,000 X 6%

=$180,000

After tax annual interest expense = $180,000 (1-0.30)

=$126,000