Freddie Mac 2006 Annual Report Download - page 145

(d) the weighted average expected life is based on historical option exercise experience; and
(e) the weighted average risk-free interest rate is based on the U.S. Treasury yield curve in eÅect at the time of the
grant.
Changes in the assumptions used to calculate the fair value of stock options could result in materially diÅerent fair value
estimates. The actual value of stock options will depend on the market value of our common stock when the stock options
are exercised.
Table 11.1 summarizes the assumptions used in determining the fair values of options granted under our stock-based
compensation plans using a Black-Scholes option-pricing model as well as the weighted average grant-date fair value of
options granted and the total intrinsic value of options exercised.
Table 11.1 Ì Assumptions and Valuations
Employee Stock Purchase Plan Employee Plans and Directors' Plan
2006 2005 2004 2006 2005(1) 2004
(dollars in millions, except share-related amounts)
Assumptions:
Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.2% to 18.7% 16.8% to 21.1% 15.4% to 20.4% 27.8% to 28.9% 18.4% to 30.3% 30.5% to 32.0%
Weighted average:
VolatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.7% 19.7% 17.8% 28.7% 30.0% 31.5%
Expected dividend yield ÏÏÏÏÏÏ 2.98% 2.15% 1.85% 3.09% Ì Ì
Expected life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 months 3 months 3 months 7.1 years 7.4 years 7.0 years
Risk-free interest rate ÏÏÏÏÏÏÏÏ 4.82% 3.20% 1.33% 4.91% 4.23% 3.55%
Valuations:
Weighted average grant-date fair
value of options granted ÏÏÏÏÏÏ $11.20 $11.56 $11.23 $16.78 $26.84 $25.04
Total intrinsic value of options
exercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3 $2 $3 $20 $32 $66
(1) The value of the dividend equivalent feature of options for the Employee Plans and Directors' Plan was incorporated into the Black-Scholes model by
using an expected dividend yield of zero percent. To account for a modiÑcation of stock options on November 30, 2005, the dividend equivalent feature
of aÅected stock options for the Employee Plans and Directors' Plan was valued separately. Other assumptions used to value the aÅected stock
options were as follows: (a) expected volatility of 25.4 percent, (b) expected dividend yield of 2.96 percent, (c) expected life of 5.1 years, and (d) risk-
free interest rate of 4.34 percent. Subsequent to November 30, 2005, dividend equivalent rights are no longer granted in connection with new awards
of stock options to grantees.
Table 11.2 provides a summary of activity under the ESPP for the year ended December 31, 2006, and those options to
purchase stock that are exercisable at December 31, 2006.
Table 11.2 Ì ESPP Activity
Options to Weighted Average Aggregate
Purchase Weighted Average Remaining Intrinsic
Stock Exercise Price Contractual Term Value
(dollars in millions, except share-related amounts)
Outstanding at January 1, 2006(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,584 $52.16
Granted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 226,266 53.73
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (222,703) 50.51
Forfeited or expired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,249) 51.67
Outstanding at December 31, 2006(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,898 58.09 1 month $1
Exercisable at December 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì
(1) Weighted average exercise price noted for options to purchase stock granted under the ESPP is calculated based on the average price on the grant date.
Table 11.3 provides a summary of option activity under the Employee Plans and Directors' Plan for the year ended
December 31, 2006, and options exercisable at December 31, 2006.
Table 11.3 Ì Employee Plans and Directors' Plan Option Activity
Weighted Average Aggregate
Stock Weighted Average Remaining Intrinsic
Options Exercise Price Contractual Term Value
(dollars in millions, except share-related amounts)
Outstanding at January 1, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,693,684 $56.20
GrantedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 423,294 60.66
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (914,368) 42.02
Forfeited or expiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (350,685) 61.38
Outstanding at December 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,851,925 58.43 5.76 years $55
Exercisable at December 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,706,396 57.17 4.61 years $40
We received cash of $35 million from the exercise of stock options under the Employee Plans and the Directors' Plan
during 2006. We realized a tax beneÑt of $7 million as a result of tax deductions available to us upon the exercise of stock
options under the Employee Plans and the Directors' Plan during 2006. During 2006, we did not pay cash to settle share-
133 Freddie Mac