Avon 2009 Annual Report Download - page 83

The methods and assumptions used to estimate fair value are
as follows:
Cash and cash equivalents, Grantor trust cash and cash equivalents
and Short term investments –Given the short term nature of these
financial instruments, the stated cost approximates fair value.
Available-for-sale securities –The fair values of these investments
were based on the quoted market prices for issues listed on
securities exchanges.
Debt maturing within one year and long-term debt –The fair
values of all debt and other financing were determined based on
quoted market prices.
Foreign exchange forward contracts –The fair values of forward
contracts were based on quoted forward foreign exchange
prices at the reporting date.
Interest-rate swap agreements –The fair values of interest-rate
swap agreements were estimated based LIBOR yield curves at
the reporting date.
NOTE 9. Share-Based Compensation
Plans
The Avon Products, Inc. 2005 Stock Incentive Plan (the “2005
Plan”), which is shareholder approved, provides for several types
of share-based incentive compensation awards including stock
options, stock appreciation rights, restricted stock, restricted
stock units and performance unit awards. Under the 2005 Plan,
the maximum number of shares that may be awarded is
31,000,000 shares, of which no more than 8,000,000 shares
may be used for restricted stock awards and restricted stock unit
awards. Shares issued under share-based awards will be primarily
funded with issuance of new shares.
We have issued stock options, restricted stock, restricted stock
units and stock appreciation rights under the 2005 Plan. Stock
option awards are granted with an exercise price equal to the
closing market price of our stock at the date of grant; those
option awards generally vest in thirds over the three-year period
following each option grant date and have ten-year contractual
terms. Restricted stock or restricted stock units generally vest
after three years.
For the years ended December 31:
2009 2008 2007
Compensation cost for stock options,
restricted stock, restricted stock
units, and stock appreciation rights $54.9 $54.8 $61.6
Total income tax benefit recognized
for share-based arrangements 18.5 18.8 20.7
All of the compensation cost for stock options, restricted stock,
restricted stock units, and stock appreciation rights for 2009,
2008, and 2007 was recorded in selling, general and admin-
istrative expenses. For the years ended December 31, 2009 and
2008, we have determined that we have apool of windfall tax
benefits.
Stock Options
The fair value of each option award is estimated on the date of
grant using aBlack-Scholes-Merton option pricing model with
the following weighted-average assumptions for options granted
during the years ended December 31:
2009 2008 2007
Risk-free rate(1) 1.6% 2.3% 4.5%
Expected term(2) 4years 4years 4years
Expected volatility(3) 35% 28% 27%
Expected dividends(4) 4.0% 2.0% 2.1%
(1)The risk-free rate was based upon the rate on azero 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 was based on historical employee
exercise behavior, the vesting terms of the respective option and a
contractual life of ten years.
(3)Expected volatility was based on the weekly historical volatility of our
stock price, over aperiod similar to the expected life of the option.
(4)Assumed the current cash dividends of $.21 during 2009, $.20 during
2008 and $.185 during 2007 per share each quarter on our common
stock for options granted during those years.
The weighted-average grant-date fair values per share of options
granted were $3.18 during 2009, $8.04 during 2008 and $8.41
during 2007.
AVON2009 F-19