AMD 2006 Annual Report Download - page 138

Table of Contents
Valuation and Expense Information under SFAS 123R
The following table summarizes stock-based compensation expense related to employee stock options, restricted stock and restricted stock units and
employee stock purchases under the Company’s Employee Stock Purchase Plan for the year ended December 31, 2006, which was allocated in the consolidated
statements of operations as follows:
Amount
(In millions)
Stock-based compensation included as a component of:
Cost of sales $ 8
Research and development 30
Marketing, general, and administrative 39
Total stock-based compensation expense related to employee stock options, restricted stock,
restricted stock units, and employee stock purchases 77
Tax benefit —
Stock-based compensation expense related to employee stock options, restricted stock, restricted
stock units, and employee stock purchases, net of tax $ 77
The Company did not capitalize stock-based compensation cost as part of the cost of an asset because the cost was insignificant. Following adoption of
SFAS 123R, the Company began estimating the value of employee stock options on the date of grant using a lattice-binomial option-pricing model
(lattice-binomial model). Prior to the adoption of SFAS 123R, for purposes of the pro forma disclosure information that the Company provided in accordance
with SFAS 123, the value of each employee stock option was estimated on the date of grant using the Black-Scholes option-pricing model.
The Company’s employee stock options have various restrictions including vesting provisions and restrictions on transfer, and must be exercised prior to
their expiration date. The Company believes that the lattice-binomial model is more capable of incorporating the features of the Company’s employee stock
options than closed-form models such as the Black-Scholes model.
The use of the lattice-binomial model requires the use of extensive actual employee exercise behavior data and the use of a number of complex
assumptions including expected volatility of the Company’s common stock, risk-free interest rate, and expected dividends. The weighted-average estimated value
of employee stock options granted for the year ended December 31, 2006 was $9.40 per share, using the lattice-binomial model with the following
weighted-average assumptions:
Expected life (years) 2.38
Expected stock price volatility 53.1%
Risk-free interest rate 5.01%
The Company used a combination of the historical volatility of its common stock and the implied volatility for two-year traded options on the Company’s
common stock as the expected volatility assumption required by the lattice-binomial model. The implied volatility was based upon the availability of actively
traded options on the Company’s common stock. The Company believes that the use of implied volatility is more representative of future stock price trends for
the two-year periods covered by the actively traded options’ maturities than simply using historical volatility alone. The Company believes that this blended
approach provides a better estimate of the expected future volatility of the Company’s common stock over the expected life of its stock options. Prior to 2006, the
Company had used its historical stock price volatility for purposes of its pro forma information disclosures of stock-based compensation expense.
The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company’s employee stock options. The
expected dividend yield is zero as the Company does not expect to pay dividends in the future.
The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived
output of the lattice-binomial model. The expected term of
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Source: ADVANCED MICRO DEVIC, 10-K, March 01, 2007