UPS 2008 Annual Report Download - page 94

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following is an analysis of options to purchase shares of class A common stock issued and outstanding:
Shares
(in thousands)
Weighted
Average
Exercise
Price
Weighted Average Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
Outstanding at January 1, 2008 ....... 19,223 $66.23
Exercised ........................ (918) 57.37
Granted .......................... 199 71.58
Forfeited / Expired ................. (207) 73.32
Outstanding at December 31, 2008 .... 18,297 $66.65 5.12 $ 5
Exercisable at December 31, 2008 ..... 10,163 $61.13 3.59 $ 5
Options Expected to Vest ............ 7,907 $73.54 6.98 $—
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted
average assumptions used, by year, and the calculated weighted average fair values of options are as follows:
2008 2007 2006
Expected dividend yield ............................................... 2.39% 2.28% 1.80%
Risk-free interest rate ................................................. 3.79% 4.65% 5.13%
Expected life in years ................................................. 7.5 7.5 7.0
Expected volatility ................................................... 22.24% 19.15% 18.42%
Weighted average fair value of options granted ............................ $16.77 $16.85 $21.05
Expected volatilities are based on the historical returns on our stock and the implied volatility of our
publicly-traded options. The expected dividend yield is based on the recent historical dividend yields for our
stock, taking into account changes in dividend policy. The risk-free interest rate is based on the term structure of
interest rates at the time of the option grant. The expected life represents an estimate of the period of time options
are expected to remain outstanding, and we have relied upon a combination of the observed exercise behavior of
our prior grants with similar characteristics, the vesting schedule of the grants, and an index of peer companies
with similar grant characteristics.
We received cash of $46, $52, and $30 million during 2008, 2007, and 2006, respectively, from option
holders resulting from the exercise of stock options. We received a tax benefit of $4, $9, and $12 million during
2008, 2007, and 2006, respectively, from the exercise of stock options. The adoption of FAS 123(R) required us
to change the statement of cash flow classification of these tax benefits, and as a result, these tax benefits are
reported as cash from financing activities rather than cash from operating activities.
The total intrinsic value of options exercised during 2008, 2007, and 2006 was $13, $31, and $45 million,
respectively. As of December 31, 2008, there was $49 million of total unrecognized compensation cost related to
nonvested options. That cost is expected to be recognized over a weighted average period of 2 years and 7
months.
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