AMD 2008 Annual Report Download - page 149

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 27, 2008, December 29, 2007 and December 31, 2006 was $2.16, $5.81 and
$9.40 per share respectively, using the lattice-binomial model with the following weighted-average assumptions:
Options
Year Ended
December 27,
2008
Year Ended
December 29,
2007
Year Ended
December 31,
2006
Expected life (years) ..................... 3.19 3.55 2.38
Expected stock price volatility ............. 72.0% 53.1% 53.07%
Risk-free interest rate .................... 2.4% 4.4% 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.
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
employee stock options is impacted by all of the underlying assumptions and calibration of the lattice-binomial
model. The lattice-binomial model assumes that employees’ exercise behavior is a function of the option’s
remaining vested term and the extent to which the option is in-the-money. The lattice-binomial model estimates
the probability of exercise as a function of these two variables based on the past ten year history of exercises,
post-vesting cancellations, and outstanding options on all option grants other than pre-vesting forfeitures made
by the Company.
The following table summarizes stock option activity and related information:
Year Ended
December 27, 2008
Year Ended
December 29, 2007
Year Ended
December 31, 2006
Number
of Shares
Weighted-
Average
Exercise
Price
Number
of Shares
Weighted-
Average
Exercise
Price
Number
of Shares
Weighted-
Average
Exercise
Price
(In thousands except share price)
Options:
Outstanding at beginning of
year ....................... 43,485 $16.61 47,663 $16.50 45,928 $15.14
Granted ...................... 23,724 $ 4.38 3,293 $14.09 18,985 $17.30
Canceled ..................... (8,915) $14.53 (4,459) $18.30 (1,779) $22.28
Exercised .................... (149) $ 5.85 (3,012) $ 9.67 (15,471) $12.77
Outstanding at end of year ........... 58,145 $11.97 43,485 $16.61 47,663 $16.50
Exercisable at end of year ............ 33,429 $16.77 35,091 $16.44 35,200 $15.66
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