Problem
Suppose you are a high-level employee of Vectra, a (hypothetical) publicly listed C corporation. You face a personal marginal tax rate on ordinary income of 30% and a tax rate of 15% on capital gains. Your after-tax opportunity cost of capital is 8% per year. You hold 1,000 employee stock options that have an exercise price of $15 per option, and the current stock price is $35 today when you plan to exercise the option. You intend to hold the stock for 10 years after exercise. Assume the stock price increases to $55 over the next 10 years. Vectra's marginal tax rate is 5% due to large tax loss carryforwards and its aftertax cost of capital is 8%.
• What is your expected after-tax accumulation if you simply hold the restricted stock until the vesting date (that is, do nothing and sell the restricted stock at vesting date)?