3M 2006 Annual Report Download - page 105

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
For annual and progressive (reload) options, the weighted average fair value at the date of grant was calculated using the
Black-Scholes option-pricing model and the assumptions that follow.
 
MSOP Assumptions Annual Progressive (Reload)
2006 2005 2004 2006 2005 2004
Exercise price $87.23 $76.87 $84.39 $80.44 $81.19 $83.10
Risk-free interest rate 5.0% 4.0% 4.1% 4.5% 3.7% 2.7%
Dividend yield 2.0% 2.0% 2.2% 2.0% 2.0% 2.2%
Volatility 20.0% 23.5% 23.8% 20.1% 20.9% 21.6%
Expected life (months) 69 69 73 39 40 39
Black-Scholes fair value $19.81 $18.28 $20.30 $12.53 $13.18 $ 12.42
In connection with the adoption of SFAS No. 123R, in 2005 the Company reviewed and updated, among other things,
its volatility and expected term assumptions. Expected volatility is a statistical measure of the amount by which a stock
price is expected to fluctuate during a period. For the 2006 and 2005 annual grant date, the Company estimated the
expected volatility based upon the average of the most recent one year volatility, the median of the term of the
expected life rolling volatility, the median of the most recent term of the expected life volatility of 3M stock, and the
implied volatility on the grant date. The expected term assumption is based on the weighted average of historical
grants and assuming that options outstanding are exercised at the midpoint of the future remaining term.