A. Option 1 After-tax value of the Compensation Package is $36,000.
Option 2 After-tax value of the Compensation Package is $32,500.
Option 3 After-tax value of the Compensation Package is $35,750.
Option 4 After-tax value of the Compensation Package is $35,750.
B. Option 1
Now, let's calculate the after-tax value for each compensation package for the initial year:
OPTION 1 COMPENSATION PACKAGE:
Salary: $60,000
Restricted Stock: $0
Taxable Total: $60,000
Tax Rate: 35%
Tax Paid: ($21,000)
After-tax cash value: $39,000
Health care expenses: ($3,000)
Final After-tax value: $36,000.
Thus, Option 1 provides an After-tax value of $36,000.
OPTION 2 COMPENSATION PACKAGE:
Salary: $50,000
Restricted Stock: $0
Taxable Total: $50,000
Tax Rate: 35%
Tax Paid: ($17,500)
After-tax cash value: $32,500
Health care expenses: ($0)
Final After-tax value: $32,500.
Thus, Option 2 results in an After-tax value of $32,500.
OPTION 3 COMPENSATION PACKAGE:
Salary: $45,000
Restricted Stock: $10,000
Taxable Total: $55,000
Tax Rate: 35%
Tax Paid: ($19,250)
After-tax cash value: $35,750
Health care expenses: ($0)
Final After-tax value: $35,750.
Thus, Option 3 leads to an After-tax value of $35,750.
OPTION 4 COMPENSATION PACKAGE:
Salary: $45,000
NQO's: $10,000
Taxable Total: $55,000
Tax Rate: 35%
Tax Paid: ($19,250)
After-tax cash value: $35,750
Health care expenses: ($0)
Final After-tax value: $35,750.
Thus, Option 4 also results in an After-tax value of $35,750.
Therefore, when focusing solely on maximizing after-tax value for year 1, Option 1 is the best choice at $36,000.
