Avon 2007 Annual Report Download - page 71

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Stock Options
The fair value of each option award is estimated on the date of
grant using a Black-Scholes-Merton option pricing model with
the following weighted-average assumptions for options granted
during the years ended December 31, :
2007 2006 2005
Risk-free rate (1) 4.5% 5.1% 4.2%
Expected term (2) 4 years 4 years 4 years
Expected volatility (3) 27% 26% 25%
Expected dividends (4) 2.1% 2.3% 1.6%
(1) The risk-free rate is based upon the rate on a zero coupon U.S. Treasury
bill, for periods within the contractual life of the option, in effect at the
time of grant.
(2) The expected term of the option is based on historical employee
exercise behavior, the vesting terms of the respective option and a
contractual life of ten years.
(3) Expected volatility is based on the weekly historical volatility of our
stock price, over a period similar to the expected life of the option.
(4) Assumes the current cash dividends of $.185, $.175 and $.165 per
share each quarter on Avon’s common stock for options granted
during 2007, 2006 and 2005, respectively.
The weighted-average grant-date fair values per share of options
granted during 2007, 2006 and 2005, were $8.41, $6.75 and
$9.07, respectively.
A summary of stock options as of December 31, 2007, and changes during 2007, is as follows:
Shares
(in 000’s)
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at January 1, 2007 24,658 $31.85
Granted 2,279 36.75
Exercised (3,410) 24.24
Forfeited (409) 37.80
Expired (470) 38.27
Outstanding at December 31, 2007 22,648 $33.25 6.3 $156.8
Exercisable at December 31, 2007 16,422 $31.91 5.6 $134.3
At December 31, 2007, there was approximately $13.4 of
unrecognized compensation cost related to stock options out-
standing. That cost is expected to be recognized over a
weighted-average period of 1.3 years. We recognize expense on
stock options using a graded vesting method, which recognizes
the associated expense based on the timing of option vesting
dates.
Cash proceeds, tax benefits, and intrinsic value related to total
stock options exercised during 2007, 2006 and 2005, were as
follows:
2007 2006 2005
Cash proceeds from stock options
exercised $85.5 $32.5 $61.4
Tax benefit realized for stock options
exercised 16.8 4.1 20.6
Intrinsic value of stock options
exercised 50.5 11.7 57.1
Restricted Stock and Restricted Stock Units
The fair value of restricted stock and restricted stock units
granted prior to January 1, 2007, was determined based on the
average of the high and low market prices of our common stock
on the grant date. Effective January 1, 2007, the fair value of
restricted stock and restricted stock units granted was
determined based on the closing price of our common stock on
the date of grant.
A summary of restricted stock and restricted stock units at
December 31, 2007, and changes during 2007, is as follows:
Restricted
Stock
And Units
(in 000’s)
Weighted-
Average
Grant-Date
Fair Value
Nonvested at January 1, 2007 1,980 $32.54
Granted 1,214 36.84
Vested (416) 34.28
Forfeited (87) 33.19
Nonvested at December 31, 2007 2,691 $34.71
A V O N 2007 F-19