Cogeco 2005 Annual Report Download - page 49

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9CAPITAL STOCK (continued)
The Corporation recorded compensation expense for options granted on or after September 1, 2003. If compensation cost had been recognized
using the fair value-based method at the grant date for options granted between September 1, 2001 and August 31, 2003, the Corporation’s
net income (loss) and earnings (loss) per share for the years ended August 31, 2005 and 2004 would have been reduced (increased)
to the following pro forma amounts:
(amounts are in thousands of dollars, except per share data) 2005 2004
$$
Net income (loss)
As reported 28,721 (32,194)
Pro forma 28,337 (32,578)
Basic and diluted earnings (loss) per share
As reported 0.72 (0.81)
Pro forma 0.71 (0.82)
The fair value of each option granted was estimated on the grant date for purposes of determining stock-based compensation expense
using the Binomial option pricing model based on the following assumptions:
(in percentage, except expected life in years) 2005 2004
%%
Expected dividend yield 1.27 1.27
Expected volatility 43 49
Risk-free interest rate 3.70 4.04
Expected life in years 4.0 3.9
The fair value of stock options granted for the year ended August 31, 2005 was $7.46 ($6.53 in 2004) per option.
For purpose of compensation expense and pro forma disclosures, stock-based compensation is amortized to expense on a straight-line basis
over the vesting period, which is four years.
The Binomial option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option pricing models require the use of highly subjective assumptions including the expected stock
price volatility. Because the Corporation’s employee stock options have characteristics significantly different from those of traded options,
and because changes in the subjective assumptions can have a significant effect on the fair value estimate, in management’s opinion, the existing
option pricing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Cogeco Cable Inc. 2005
47
Notes to Consolidated Financial Statements