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47
Valuation and Expense Information under SFAS 123R
Under SFAS 123R, the value of share-based compensation awards must be attributed to the
various periods during which the recipient must perform services in order to vest in the award.
Upon adoption of SFAS 123R, the Company changed its method of attributing the value of share-
based compensation expense from the accelerated approach specified in FASB Interpretation No.
28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans” to
the straight-line method. Compensation expense for awards made prior to January 1, 2006 will
continue to be subject to the accelerated expense attribution method while compensation expense
for share-based awards made on or after January 1, 2006 will be recognized using a straight-line
method.
The fair value of each stock option grant made after April 1, 2005 was estimated on the grant date
using a lattice-binomial model. The fair value of each stock option grant made prior to April 2, 2005
was estimated on the grant date using the Black-Scholes model. The weighted-average estimated
grant date fair values and the assumptions used to value option grants and compensatory stock
purchase rights under the ESPP for the years ended December 31, 2004, 2005, and 2006 are as
follows:
2006 2005 2004
Weighted-average grant date fair values of option
awards $ 24.88 $ 18.08
$ 33.44
Risk-free interest rate 4.9 % 4.0 % 3.2 %
Dividend yield 0.9 % 0.7 % 0.6 %
Expected life (years) 6.7 4.5 5.0
Stock price volatility 37.07 % 39.62 % 58.80 %
The Company estimated the expected future volatility used in the lattice-binomial model valuation
based on a combination of historic and implied volatility of the Company’s common stock. 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 lattice-
binomial model takes into consideration early exercise behavior or patterns based on stock price
appreciation. The Company estimated early exercise behavior patterns based on an analysis of
historical exercise behavior. The risk-free interest rate assumption was based upon observed
interest rates appropriate for the term of the Company’s stock options. The expected life of the
options granted is derived from the output of the lattice-binomial option valuation model and
represents the weighted-average period of time that options granted are expected to be
outstanding. The dividend yield is based on the Company’s history and expectation of dividend
payouts.