Activision 2012 Annual Report Download - page 80

62
Employee and director options
For the Year Ended
December 31, 2012
For the Year Ended
December 31, 2011
For the Year Ended
December 31, 2010
Expected life (in years) ..................................................................................
7.05
6.58
5.79
Risk free interest rate ......................................................................................
1.12%
1.91%
2.97%
Volatility .........................................................................................................
40.76%
43.50%
46.20%
Dividend yield ................................................................................................
1.65%
1.34%
1.33%
Weighted-average fair value at grant date .....................................................
$3.47
$4.17
$3.98
To estimate volatility for the binomial-lattice model, we use methods that consider the implied volatility method based upon the
volatilities for exchange-traded options on our stock to estimate short-term volatility, the historical method (annualized standard deviation of the
instantaneous returns on Activision Blizzard’s stock) during the option’s contractual term to estimate long-term volatility, and a statistical model
to estimate the transition or “mean reversion” from short-term volatility to long-term volatility. Based on these methods, for options granted
during the year ended December 31, 2012, the expected stock price volatility ranged from 29.70% to 42.70%.
As is the case for volatility, the risk-free rate is assumed to change during the option’s contractual term. Consistent with the
calculation required by a binomial-lattice model, the risk-free rate reflects the interest from one time period to the next (“forward rate”) as
opposed to the interest rate from the grant date to the given time period (“spot rate”). The expected dividend yield assumption for options granted
during the year ended December 31, 2012 is based on the Company’s historical and expected future amount of dividend payouts.
The expected life of employee stock options represents the weighted-average period the stock options are expected to remain
outstanding and is an output from the binomial-lattice model. The expected life of employee stock options depends on all of the underlying
assumptions and calibration of our model. A binomial-lattice model can be viewed as assuming that employees will exercise their options when
the stock price equals or exceeds an exercise multiples, of which the multiple is based on historical employee exercise behaviors.
As stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 31, 2012,
2011, and 2010 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on
historical experience.
Accuracy of Fair Value Estimates
We developed the assumptions used in the binomial-lattice model, including model inputs and measures of employees’ exercise and
post-vesting termination behavior. Our ability to accurately estimate the fair value of stock-based payment awards at the grant date depends upon
the accuracy of the model and our ability to accurately forecast model inputs as long as ten years into the future. These inputs include, but are not
limited to, expected stock price volatility, risk-free rate, dividend yield, and employee termination rates. Although the fair value of employee
stock options is determined using an option-pricing model, the estimates that are produced by this model may not be indicative of the fair value
observed between a willing buyer and a willing seller. Unfortunately, it is difficult to determine if this is the case, as markets do not currently
exist that permit the active trading of employee stock option and other stock-based instruments.
Stock Option Activities
Stock option activities for the year ended December 31, 2012 are as follows (amounts in millions, except number of shares, which are
in thousands, and per share amounts):
Shares
Weighted-average
exercise price
Weighted-average
remaining contractual
term
Aggregate
intrinsic value
Outstanding stock options at December 31, 2011 ............................
53,162
$11.12
Granted ..............................................................................................
4,296
10.95
Exercised ...........................................................................................
(4,790)
6.91
Forfeited ............................................................................................
(423)
12.35
Expired ..............................................................................................
(497)
14.86
Outstanding stock options at December 31, 2012 ............................
51,748
11.45
6.06
$37
Vested and expected to vest at December 31, 2012 .........................
50,553
$11.44
5.52
$37
Exercisable at December 31, 2012 ....................................................
39,473
$11.36
5.35
$37