CVS 2007 Annual Report Download - page 64

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60 I CVS Caremark
Following is a summary of the Company’s stock option activity as of December 29, 2007:
Weighted Average
Weighted Average Remaining Aggregate
Shares in thousands Shares Exercise Price Contractual Term Intrinsic Value
Outstanding at December 30, 2006 41,617 $ 21.35 – –
Granted 12,958 34.66 – –
Issued in Caremark Merger 36,838 16.44 – –
Exercised (29,868) 16.47 – –
Forfeited (1,165) 30.49 – –
Expired (358) 18.39 – –
Outstanding at December 29, 2007 60,022 $ 23.47 5.00 $ 992,215,995
Exercisable at December 29, 2007 40,492 $ 19.23 4.61 $ 840,981,532
All grants under the ICP are awarded at fair market value on
the date of grant. The fair value of stock options is estimated
using the Black-Scholes Option Pricing Model and compensation
expense is recognized on a straight-line basis over the requisite
service period. Options granted prior to 2004 generally become
exercisable over a four-year period from the grant date and expire
ten years after the date of grant. Options granted during and
subsequent to fiscal 2004 generally become exercisable over a
three-year period from the grant date and expire seven years
after the date of grant. As of December 29, 2007, there were
73.4 million shares available for future grants under the ICP.
SFAS No. 123(R) requires that the benefit of tax deductions
in excess of recognized compensation cost be reported as a
financing cash flow, rather than as an operating cash flow as
required under prior guidance. Excess tax benefits of $97.8 mil-
lion and $42.6 million were included in financing activities in
the accompanying consolidated statement of cash flow during
2007 and 2006, respectively. Cash received from stock options
exercised, which includes the ESPP, totaled $552.4 million and
$187.6 million during 2007 and 2006, respectively. The total
intrinsic value of options exercised during 2007 was $642.3 mil-
lion, compared to $117.8 million and $117.5 million in 2006 and
2005, respectively. The fair value of options exercised during 2007
was $1.2 billion, compared to $257.1 million and $263.3 million
during 2006 and 2005, respectively.
The fair value of each stock option is estimated using the Black-
Scholes Option Pricing Model based on the following assumptions at
the time of grant:
2007 2006 2005
Dividend yield(1) 0.69% 0.50% 0.56%
Expected volatility(2) 23.84% 24.58% 34.00%
Risk-free interest rate(3) 4.49% 4.7% 4.3%
Expected life
(in years)
(4) 5.12 4.2 5.7
Weighted average grant
date fair value $ 8.29 $ 8.46 $ 8.46
(1) The dividend yield is based on annual dividends paid and the fair
market value of the Company’s stock at the period end date.
(2) The expected volatility is estimated using the Company’s historical
volatility over a period equal to the expected life of each option grant
after adjustments for infrequent events such as stock splits.
(3) The risk-free interest rate is selected based on yields from U.S.
Treasury zero-coupon issues with a remaining term equal to the
expected term of the options being valued.
(4) The expected life represents the number of years the options are
expected to be outstanding from grant date based on historical option
holder exercise experience.
As of December 29, 2007, unrecognized compensation expense
related to unvested options totaled $126.0 million, which the
Company expects to be recognized over a weighted-average
period of 1.8 years. After considering anticipated forfeitures, the
Company expects approximately 18.7 million of the unvested
options to vest over the requisite service period.