Best Buy 2007 Annual Report Download - page 92

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$ in millions, except per share amounts
77
PART II
The weighted-average grant-date fair value of stock options
granted during fiscal 2007, 2006 and 2005 was $22.32,
$18.54 and $14.18, respectively, per share. The aggregate
intrinsic value of our stock options (the amount by which the
market price of the stock on the date of exercise exceeded
the exercise price of the option) exercised during fiscal
2007, 2006 and 2005, was $160, $197 and $156,
respectively. At March 3, 2007, there was $154 of
unrecognized compensation expense related to stock
options that is expected to be recognized over a weighted-
average period of 2.1 years.
Net cash proceeds from the exercise of stock options were
$168, $257 and $220 in fiscal 2007, 2006 and 2005,
respectively.
The actual income tax benefit realized from stock option
exercises was $55, $53 and $59, in fiscal 2007, 2006 and
2005, respectively.
Prior to fiscal 2006, we used the Black-Scholes option-
pricing model to estimate the fair value of each stock
option. For grants subsequent to our adoption of SFAS
No. 123(R), we estimate the fair value of each stock option
using a lattice model. We believe the lattice model more
accurately estimates stock-based compensation expense as
it incorporates additional variables, including historical
exercise behavior.
The fair value of each stock option was estimated on the date of grant using a lattice model in fiscal 2007 and 2006 and
the Black-Scholes option-pricing model in fiscal 2005, with the following assumptions:
Valuation Assumptions(1)
March 3,
2007
Lattice
Feb.25,
2006
Lattice
Feb.26,
2005
Black-Scholes
Risk-free interest rate(2) 4.8% - 5.2% 4.3% - 4.6% 3.4%
Expected dividend yield 0.8% 0.8% 0.9%
Expected stock price volatility(3) 40% 40% 40%
Expected life of stock options (in years)(4) 5.9 6.1 5.5
(1) Forfeitures are estimated using historical experience and projected employee turnover.
(2) Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of our stock options.
(3) We use an outside valuation advisor to assist us in projecting expected stock price volatility. We consider both the historical volatility of
our stock price as well as implied volatilities from exchange-traded options on our stock.
(4) We estimate the expected life of stock options based upon historical experience.
Market-Based Share Awards
The fair value of market-based share awards is determined based on generally accepted valuation techniques and the
closing market price of our stock on the date of grant. A summary of the status of our market-based nonvested share awards
at March 3, 2007, and changes during fiscal 2007, is as follows:
Market-Based Share Awards Shares
Weighted-
Average
FairValue
per Share
Outstanding at February 25, 2006 2,678,000 $30.36
Granted 743,000 37.68
Vested (201,000) 38.41
Forfeited/Canceled (1,070,000) 34.65
Outstanding at March 3, 2007 2,150,000 $ 30.01
We recognized $20 of expense in fiscal 2007 for market-
based share awards. We recognize expense for market-
based share awards on a straight-line basis over the
requisite service period (or to an employee’s eligible
retirement date, if earlier). At March 3, 2007, there was
$31 of unrecognized compensation expense related to
market-based nonvested share awards that is expected to
be recognized over a weighted-average period of
1.8 years.