First Data 2007 Annual Report Download - page 134

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Predecessor
ESPP (b)
Period from
January 1
through
September 24,
2007 2006 2005(a)
Risk-free interest rate 4.75% 4.74% 3.11%
Dividend yield 0.47% 0.54% 0.58%
Volatility 23.9% 22.9% 19.1%
Expected term (in years) 0.25 0.25 0.25
Fair value $ 6 $ 8 $ 8
(a) Assumptions used to calculate pro forma compensation expense under SFAS 123 discussed above.
(b) The ESPP was terminated as of June 30, 2007.
Expected volatility—Prior to 2006, the Company used historical volatility to estimate the grant-date fair value of stock options and ESPP rights. The
Company changed its method of estimating expected volatility for all stock options granted and ESPP rights after January 1, 2006 to implied volatility. The
change in assumption, made in conjunction with the adoption of SFAS 123R, was expected to result in a more accurate estimate of the grant-date fair value of
employee stock options. The Company calculated implied volatility on a daily basis using the Black-Scholes option pricing model. This calculation
incorporated the market prices of a variety of traded options, the market price of the Company's stock, the exercise price and remaining term of the traded
options, the expected dividends, and the risk-free rate. The traded options used were similar in exercise price to awards granted to employees, were near-the-
money, and typically had a remaining maturity of greater than one year. For each grant, the Company used the average of the daily implied volatilities for the
six months preceding the grant date. For grants made after the Western Union spin-off, the Company used the average of the daily implied volatility for the
period between the spin-off and the grant date. Using implied volatility versus historical volatility to value the stock options granted in 2006 resulted in a
decrease in the total grant-date fair value of approximately $20 million.
Expected dividend yield—The dividend yield was the calculation of a rolling 12 month average stock price divided by the annualized dividend amount.
Expected term—The Company aggregated stock option awards into classes. For each class, the expected term was primarily based on the results of a
study performed on the historical exercise and post-vesting employment termination behavior for similar grants. The expected terms were as follows: 4.5 year
life for employees (Non-Board of Directors, Non-Executives), 7 year life for the Board of Directors and 7.5 year life for the Executive Committee. The
expected term of ESPP rights was 0.25 years as purchase rights were achieved over the course of the quarter in which the employee participated in the
employee stock purchase plan. Once the shares were purchased, the employee could sell their respective shares.
Risk-free interest rate—The risk-free rate for stock options granted during the period was determined by using a zero-coupon U.S. Treasury rate for the
period that coincided with the expected terms listed above. The risk-free rate for ESPP rights was determined by using a 3-month maturity U.S. Treasury
bond.
A summary of FDC stock option activity for the predecessor period from January 1, 2007 through September 24, 2007 is as follows (options in
millions):
Options
Weighted-
Average
Exercise
Price
Outstanding at January 1, 2007 47.1 $ 21
Granted 7.0 $ 25
Exercised (7.7) $ 19
Cancelled / Forfeited * (46.4) $ 22
Outstanding at September 24, 2007 —
* As noted above, vesting of stock options was accelerated upon the closing of the merger and then cancelled with a right to receive cash.
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