Answer to Question #52113 in Microeconomics for Asif

Question

An executive’s employment contract calls for salary of $400,000 per year, a bonus equals to 2 percent of profits in excess of $10,000,000, and an option to buy 5,000 shares of common stock at a price of $50 per share. The market price of the stock is $70 per share and the firm’s profits for the current year are $12,000,000. Assuming the executive exercise the stock option and then sells the stock, what is the total compensation for the year?

Answer 1

Salary of $400,000 per year, a bonus equals to 2 percent of profits in excess of $10,000,000, and an option to buy 5,000 shares of common stock at a price of $50 per share (Pm = $70 per share and TP = $12,000,000). Assuming the executive exercise the stock option and then sells the stock, the total compensation for the year will be: C = 400,000 + 0.02*12,000,000 + 5,000/50*(70 - 50) = $642,000.