Western Digital 2012 Annual Report Download - page 79

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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value Disclosure — Binomial Model
The fair value of stock options granted is estimated using a binomial option-pricing model. The binomial model
requires the input of highly subjective assumptions including the expected stock price volatility, the expected price
multiple at which employees are likely to exercise stock options and the expected employee termination rate. The
Company uses historical data to estimate option exercise, employee termination, and expected stock price volatility
within the binomial model. The risk-free rate for periods within the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant. The fair value of stock options granted during the three years
ended June 29, 2012 was estimated using the following weighted average assumptions:
2012 2011 2010
Suboptimal exercise factor ................ 1.81 1.81 1.73
Range of risk-free interest rates ............ 0.12% to 1.61% 0.20% to 2.90% 0.31% to 3.40%
Range of expected stock price volatility ...... 0.41 to 0.55 0.39 to 0.59 0.40 to 0.72
Weighted average expected volatility ....... 0.49 0.52 0.57
Post-vesting termination rate ............. 2.61% 2.44% 3.57%
Dividend yield ........................ — — —
Fair value ............................ $12.91 $11.42 $17.09
The weighted average expected term of the Company’s stock options granted during 2012, 2011 and 2010 was
4.9 years, 4.7 years and 4.6 years, respectively.
Fair Value Disclosure — Black-Scholes-Merton Model
The fair value of ESPP purchase rights issued is estimated at the date of grant of the purchase rights using the
Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model was developed for use
in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-
Scholes-Merton option-pricing model requires the input of highly subjective assumptions such as the expected stock
price volatility and the expected period until options are exercised. Purchase rights under the current ESPP provisions
are granted on either June 1st or December 1st of each year.
The fair values of all ESPP purchase rights granted on or prior to June 29, 2012 have been estimated at the date
of grant using a Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
ESPP
2012 2011 2010
Option life (in years) .................................................... 1.24 1.25 1.24
Risk-free interest rate ................................................... 0.22% 0.44% 0.57%
Stock price volatility .................................................... 0.46 0.44 0.53
Dividend yield ......................................................... — — —
Fair value ............................................................. $7.29 $8.36 $10.02
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