eTrade 2007 Annual Report Download - page 134

The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option
pricing model based on the assumptions noted in the table below. Expected volatility is based on a combination
of historical volatility of the Company’s stock and implied volatility of publicly traded options on the Company’s
stock. The expected term represents the period of time that options granted are expected to be outstanding. The
expected term is estimated using employees’ actual historical behavior and projected future behavior based on
expected exercise patterns. The risk-free interest rate is based on the U.S. Treasury zero-coupon bond where the
remaining term equals the expected term. Dividend yield is zero as the Company has not, nor does it currently
plan to, issue dividends to its shareholders.
Year Ended December 31,
2007 2006 2005
Expected volatility 32% 34% 34%
Expected term (years) 4.5 4.5 4.9
Risk-free interest rate 5% 5% 4%
Dividend yield — — —
The weighted-average fair values of options granted were $7.48, $8.60 and $4.57 for the years ended
December 31, 2007, 2006 and 2005, respectively. Intrinsic value of options exercised were $50.6 million,
$89.1 million and $67.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.
A summary of options activity under the 2005 Plan is presented below:
Shares
(in thousands)
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at December 31, 2006 35,755 $12.72 5.92 $370,368
Granted 5,561 $21.61
Exercised (4,095) $ 7.94
Canceled (4,465) $18.75
Outstanding at December 31, 2007 32,756 $14.02 4.43 $ 18
Vested and expected to vest at December 31, 2007 29,897 $13.48 4.27 $ 18
Exercisable at December 31, 2007 22,318 $11.29 3.62 $ 18
As of December 31, 2007, there was $40.1 million of total unrecognized compensation cost related to
non-vested stock options. This cost is expected to be recognized over a weighted-average period of 2.2 years.
Restricted Stock Awards and Restricted Stock Units
The Company issues restricted stock awards to its officers and senior executives and restricted stock units to
international officers. These awards are issued at the fair market value on the date of grant and generally vest
ratably over four years. However, certain awards vest on the fifth anniversary of the date of grant. The fair value
is calculated as the market price upon issuance.
The Company recorded $9.4 million, $10.5 million and $4.2 million for the years ended December 31,
2007, 2006 and 2005, respectively, in compensation expense related to restricted stock awards and restricted
stock units. The Company recognized a tax benefit of $3.2 million, $4.0 million and $1.6 million related to
restricted stock awards and restricted stock units for the years ended December 31, 2007, 2006 and 2005,
respectively.
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