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94
exercises of stock options and vesting of restricted stock and performance shares, we instituted a stock repurchase program.
See Note 12 for information regarding our stock repurchase programs.
Valuation of Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award. We currently use the
Black-Scholes option pricing model to determine the fair value of stock options and ESPP shares. The determination of the
fair value of stock-based payment awards on the date of grant using an option pricing model is affected by our stock price as
well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock
price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, a risk-
free interest rate and any expected dividends.
We estimate the expected term of options granted by calculating the average term from our historical stock option
exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options. Our
decision to use implied volatility was based upon the availability of actively traded options on our common stock and our
assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the
risk-free interest rate that we use in the option valuation model on zero-coupon yields implied by U.S. Treasury issues with
remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the
foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to
estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those
estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense
only for those awards that are expected to vest.
The assumptions used to value our option grants were as follows:
Fiscal Years
2008
2007
2006
Expected term (in years) ........
2.3 – 4.7
3.5 – 4.8
3.7
Volatility .....................
32 – 60
%
30 – 39
%
30 – 37
%
Risk-free interest rate ...........
1.70 – 3.50
%
3.60 – 5.10
%
4.30 – 5.20
%
The expected term of ESPP shares is the average of the remaining purchase periods under each offering period. The
assumptions used to value employee stock purchase rights were as follows:
Fiscal Years
2008
2007
2006
Expected term (in years) ........
0.5 – 2.0
0.5 – 2.0
1.3
Volatility .....................
30 – 36
%
30 – 33
%
30 – 35
%
Risk-free interest rate ...........
2.12 – 3.29
%
4.79 – 5.11
%
4.32 – 5.26
%
We recognize the estimated compensation cost of restricted stock awards and restricted stock units, net of estimated
forfeitures, over the vesting term. The estimated compensation cost is based on the fair value of our common stock on the
date of grant.
We recognize the estimated compensation cost of performance shares, net of estimated forfeitures. The awards are
earned upon attainment of identified performance goals, some of which contain discretionary metrics. As such, these awards
are re-valued based on our traded stock price at the end of each reporting period. If the discretion is removed, the award will
be classified as a fixed equity award. The fair value of the awards will be based on the measurement date, which is the date
the award becomes fixed. The awards will be subsequently amortized over the remaining performance period.
Effective April 1, 2007, the government of India implemented a new fringe benefit tax that applies to equity awards
granted to our employees in India. We incur a fringe benefit tax liability at the time the award is exercised or released. In
accordance with the laws in India, we have elected to recover, from the employee, the fringe benefit tax paid in connection
with the applicable award. Recovery of the fringe benefit tax from the employee is treated as a component of the exercise
price and as such, impacts the fair value of the awards and the related stock-based compensation. We have elected to use a
binomial option pricing model that incorporates the Black-Scholes option pricing model to calculate the fair value of stock-