Chesapeake Energy 2014 Annual Report Download - page 118

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
110
We utilize the Black-Scholes option pricing model to measure the fair value of stock options. The expected life
of an option is determined using the simplified method, as there is no adequate historical exercise behavior available.
Volatility assumptions are estimated based on an average of historical volatility of Chesapeake stock over the expected
life of an option. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant over the
expected life of the option. The dividend yield is based on an annual dividend yield, taking into account the Company's
current dividend policy, over the expected life of the option. The Company used the following weighted average
assumptions to estimate the grant date fair value of the stock options granted in 2014:
Expected option life - years 5.9
Volatility 48.63%
Risk-free interest rate 1.93%
Dividend yield 1.33%
The following table provides information related to stock option activity for 2014, 2013 and 2012:
Number of
Shares
Underlying
Options
Weighted
Average
Exercise
Price
Per Share
Weighted
Average
Contract
Life in
Years
Aggregate
Intrinsic
Value(a)
(in thousands) ($ in millions)
Outstanding at January 1, 2014 5,268 $ 19.28 6.66 $ 41
Granted 994 $ 24.43
Exercised (1,322) $ 18.71 $ 11
Expired (28) $ 18.97
Forfeited (313) $ 21.05
Outstanding at December 31, 2014 4,599 $ 19.55 7.03 $ 5
Exercisable at December 31, 2014 1,304 $ 18.71 5.70 $ 1
Outstanding at January 1, 2013 481 $ 12.69 0.96 $ 2
Granted 5,264 $ 19.32
Exercised (346) $ 10.82 $ 3
Expired (131) $ 19.31
Outstanding at December 31, 2013 5,268 $ 19.28 6.66 $ 41
Exercisable at December 31, 2013 1,552 $ 18.82 1.97 $ 13
Outstanding at January 1, 2012 1,051 $ 9.84 1.41 $ 13
Exercised (570) $ 7.45 $ 7
Outstanding and exercisable at December 31, 2012 481 $ 12.69 0.96 $ 2
___________________________________________
(a) The intrinsic value of a stock option is the amount by which the current market value or the market value upon
exercise of the underlying stock exceeds the exercise price of the option.
As of December 31, 2014, there was $11 million of total unrecognized compensation expense related to stock
options. The expense is expected to be recognized over a weighted average period of approximately 2.02 years.