EMC 2008 Annual Report Download - page 106

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair Value of VMware Options
The fair value of each option to acquire VMware Class A common stock granted during the years ended December 31, 2008 and 2007 was estimated on
the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
For the Year Ended December 31,
VMware Stock Options 2008 2007
Dividend yield None None
Expected volatility 39.4% 39.2%
Risk-free interest rate 2.5% 4.9%
Expected term (in years) 3.4 3.4
Weighted-average fair value at grant date $ 17.88 $ 27.88
For the Year Ended December 31,
VMware Employee Stock Purchase Plan 2008 2007
Dividend yield None None
Expected volatility 39.3% 34.8%
Risk-free interest rate 2.7% 4.8%
Expected term (in years) 0.5 0.4
Weighted-average fair value at grant date $ 18.06 $ 6.99
For all equity awards granted in 2008 and 2007, volatility was based on an analysis of historical stock prices and implied volatility of publicly-traded
companies with similar characteristics, including industry, stage of life cycle, size and financial leverage. The expected term was calculated based on the
historical experience that VMware employees have had with EMC stock option grants as well as the expected term of similar grants of comparable
companies. The risk-free interest rate was based on a treasury instrument whose term is consistent with the expected term of the stock options.
For the equity awards granted prior to VMware's IPO, VMware performed a contemporaneous valuation of their Class A common stock each time an
equity grant of common stock was made. In determining the fair value of the equity, VMware analyzed general market data, including economic,
governmental and environmental factors; considered its historic, current and future state of its operations; analyzed its operating and financial results;
analyzed its forecasts; gathered and analyzed available financial data for publicly traded companies engaged in the same or similar lines of business to
develop appropriate valuation multiples and operating comparisons, and analyzed other facts and data considered pertinent to the valuation to arrive at an
estimated fair value.
VMware utilized both the income approach and the market approach in estimating the value of the equity. The market approach estimates the fair value
of a company by applying to the company's historical and/or projected financial metrics market multiples of the corresponding financial metrics of publicly
traded firms in similar lines of business. The use of the market approach requires judgments regarding the comparability of companies that are similar to
VMware. If different comparable companies had been used, the market multiples and resulting estimates of the fair value of VMware's stock also would have
been different. The income approach involves applying appropriate risk-adjusted discount rates to estimated debt-free cash flows, based on forecasted
revenues and costs. The projections used in connection with this valuation were based on VMware's expected operating performance over the forecast period.
There is inherent uncertainty in these estimates. If different discount rates or other assumptions had been used, the resulting estimates of the fair value of their
stock would have been different. Due to the prospect of an imminent public offering, VMware did not apply a marketability discount in carrying out either
approach. Further, VMware did not apply a minority interest discount in concluding on fair value.
In reaching its estimated valuation range, VMware considered the indicated values derived from each valuation approach in relation to the relative merits
of each approach, the suitability of the information used, and the uncertainties involved. The results of the approaches overlapped, with the income approach
results falling within a narrower range, which VMware ultimately relied on in its concluding estimate of value.
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