Hertz 2008 Annual Report Download - page 97

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
assumptions related to volatility, expected term, dividend yield, risk-free interest rate and forfeiture rate.
These factors combined with the stock price on the date of grant result in a fixed expense which is
recorded on a straight-line basis over the vesting period. The key factors used in the valuation process,
other than the forfeiture rate, remained unchanged from the date of grant. Because the stock of Hertz
Holdings became publicly traded in November 2006 and has a short trading history, it is not practicable
for us to estimate the expected volatility of our share price, or a peer company share price, because there
is not sufficient historical information about past volatility. Therefore, we use the calculated value method
to estimate the expected volatility, based on the Dow Jones Specialized Consumer Services sub-sector
within the consumer services industry, and we use the U.S. large capitalization component, which
includes the top 70% of the index universe (by market value). Because historical exercise data does not
exist, and because we meet the requirements of Staff Accounting Bulletin No. 107, we use the simplified
method for estimating the expected term. We believe it is appropriate to continue to use this simplified
method because we do not have sufficient historical exercise data to provide a reasonable basis upon
which to estimate the expected term due to the limited period of time our common stock has been
publicly traded. The assumed dividend yield is zero. The risk-free interest rate is the implied zero-coupon
yield for U.S. Treasury securities having a maturity approximately equal to the expected term of the
options, as of the grant dates. We assume that in each year, 1% of the options that are outstanding but
not vested will be forfeited, based on our U.S. pension plan withdrawal rate assumptions. Considering
the Company’s brief history of issuing stock options and higher than average recent employee turnover,
especially among option holders, we will assess next year if a change in this assumption is warranted.
The non-cash stock-based compensation expense associated with the Hertz Global Holdings, Inc.
Stock Incentive Plan, or the ‘‘Stock Incentive Plan,’’ the Hertz Global Holdings, Inc. Director Stock
Incentive Plan, or the ‘‘Director Plan,’’ and Omnibus Plan, are pushed down from Hertz Holdings and
recorded on the books at the Hertz level. See Note 5 to the Notes to our consolidated financial
statements included in this Annual Report under the caption ‘‘Item 8—Financial Statements and
Supplementary Data.’’
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