Western Union 2007 Annual Report Download - page 79

77
Notes to Consolidated Financial Statements
For periods presented prior to the spin-off date of September
29, 2006, all stock-based compensation awards were made by
First Data, and used First Data assumptions for volatility, dividend
yield and term. Western Union assumptions, which are described
in the paragraphs below, were utilized for grants made by Western
Union on September 29, 2006 and subsequent thereto.
EXPECTED VOLATILITY — Western Union’s expected weighted-
average volatility of 23.8% was determined based on the calculated
historical peer group volatility for companies in similar industries,
stage of life cycle and market capitalization since there is not
suffi cient historical volatility data for Western Union common
stock. Expected volatility for the Company’s 2007 grants, which
varies by group based on the expected option term, was 26.9%
for the Board of Directors and executives and 22.8% for non-
executive employees. Beginning in 2006, First Data used the
implied volatility method for estimating expected volatility for all
stock options granted and ESPP rights. First Data calculated its
implied volatility on a daily basis using a Black-Scholes option
pricing model, incorporating the market prices of a variety of
traded options, the market price of First Data stock, the exercise
price and remaining term of the traded options, the expected
dividends and the risk-free rate.
EXPECTED DIVIDEND YIELD — The Company’s expected annual
dividend yield is calculated based on Western Union’s average
stock price on each respective grant date and an assumed annual
dividend is $0.04 per common share. First Data’s dividend yield
was the calculation of the annualized First Data dividend amount
of $0.24 divided by a rolling 12 month average First Data stock
price as of the most recent grant date for which First Data granted
options to Western Union employees.
EXPECTED TERM — Western Union’s expected term is 5.8 years
for non-executive employees, and 7.5 years for the Board of
Directors and executives. The Company’s expected term of
options was based upon, among other things, historical exercises
(including the exercise history of First Data’s awards), the vesting
term of the Company’s options, the cancellation history of the
Company’s employees options in First Data stock and the options’
contractual term of ten years. First Data has also aggregated
stock option awards into classes. For each class, the expected
term is primarily based on the results of a study performed on
the historical exercise and post-vesting employment termination
behavior for similar grants. First Data’s expected terms were as
follows: 4.5 years for non-executive employees, 7 years for the
Board of Directors and 7.5 years for its executives. The expected
term of ESPP rights were determined to be 0.25 years as purchase
rights are achieved over the course of the quarter in which the
employee participated in the ESPP. Once the shares have been
purchased, the employee can sell their respective shares.
RISK-FREE INTEREST RATE — The risk-free rate for stock options
granted during the period is determined by using a U.S. Treasury
rate for the period that coincided with the expected terms
listed above.
Year Ended December 31, 2007 2006 2005
STOCK OPTIONS GRANTED (POST-SPIN GRANTS):
Weighted-average risk-free interest rate 4.53% 4.64% —
Weighted-average dividend yield 0.18% 0.21% —
Volatility 23.8% 26.4% —
Expected term (in years) 6.2 6.6 —
Weighted-average fair value $7 $ 7 —
STOCK OPTIONS GRANTED (PRE-SPIN GRANTS):
Weighted-average risk-free interest rate — 4.62% 4.14%
Weighted-average dividend yield — 0.58% 0.58%
Volatility — 23.5% 32.7%
Expected term (in years) — 5 6
Weighted-average fair value (pre-spin) — $12 $15
ESPP:
Weighted-average risk-free interest rate — 4.85% 3.12%
Weighted-average dividend yield — 0.56% 0.58%
Volatility — 23.0% 19.1%
Expected term (in years) — 0.25 0.25
Weighted-average fair value (pre-spin) — $ 9 $ 8