Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working when the stock price was $6 per share. When the share price was $15 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $20 per share. What is the amount of Maren's bargain element?
A) $900.
B) $700.
C) $0.
D) $1,500.
E) None of the choices are correct.

Question

Quizplus · Accepted Answer

Maren's bargain element is the difference between the fair market value of the stock at the time of exercise ($15 per share) and the exercise price ($8 per share), multiplied by the number of shares exercised. So, her bargain element per option was $7 per share ($15 - $8) and for 10 options, it would be $70 per share or $700 in total.

Since Maren sold all her shares 18 months later for $20 per share, there is an additional capital gain of $5 per share ($20 - $15), but this is not considered part of the bargain element.

Maren Received 10 NQOs (Each Option Gives Her the Right