Answer to Question #52113 in Microeconomics for Asif

Question #52113
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?
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.

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