Cracker Barrel 2012 Annual Report Download - page 29

discounted using an appropriate risk-free interest rate. Other
nonvested stock awards accrue dividends and their fair value
is equal to the market price of our stock at the date of grant.
MSU Grants. In 2011, we adopted annual long-term
incentive plans that award MSU Grants to our executives
instead of stock options. In addition to providing the requisite
service, MSU Grants contain both a market condition,
total shareholder return, and a performance condition.
Total shareholder return is dened as increases in our stock
price plus dividends paid during the performance period.
e number of shares awarded may increase up to 150% of
target in direct proportion to any percentage increase
in shareholder value during the performance period. e
probability of the actual shares expected to be awarded is
considered in the grant date valuation; therefore, the expense
will not be adjusted to reect the actual units awarded.
However, if the performance condition is not met, no shares
will be granted, no compensation will ultimately be
recognized and, to the extent previously recognized, com-
pensation expense will be reversed.
e fair value of our MSU Grants was determined using the
Monte-Carlo simulation model, which simulates a range of
possible future stock prices and estimates the probabilities of
the potential payouts. e Monte-Carlo simulation model
uses the average prices for the 60-consecutive calendar days
beginning 30 days prior to and ending 30 days aer the
rst business day of the performance period. is model also
incorporates the following ranges of assumptions:
• eexpectedvolatilityisablendofimpliedvolatilitybased
on market-traded options on our stock and historical
volatility of our stock over the period commensurate with
the three-year performance period.
• erisk-freeinterestrateisbasedontheU.S.Treasuryrate
assumption commensurate with the three-year perfor-
mance period.
• eexpecteddividendyieldisbasedonourcurrent
dividend yield as the best estimate of projected dividend
yield for periods within the three-year performance period.
We update the historical and implied components of the
expected volatility assumption when new grants are made.
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Stock Options. e fair value of our stock options was
estimated on the date of grant using a binomial laice-based
option valuation model. is model incorporates several key
assumptions including expected volatility, risk-free rate of
return, expected dividend yield and the option’s expected life.
Additionally, we use historical data to estimate option
exercise and employee termination and these assumptions
are updated annually. e expected volatility, option exercise
and termination assumptions involve management’s best
estimates at that time, all of which aect the fair value of the
option calculated by the binomial laice-based option
valuation model and, ultimately, the expense that will be
recognized over the life of the option. e expected life is a
by-product of the laice model and was updated when new
grants were made. No stock options were granted in 2012.
We have not made any material changes in our estimates or
assumptions used to determine share-based compensation
during the past three years. We do not believe there is a
reasonable likelihood that there will be a material change in
the future estimates or assumptions used to determine
share-based compensation expense. However, if actual results
are not consistent with our estimates or assumptions, we may
be exposed to changes in share-based compensation expense
that could be material.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
We are exposed to market risk, such as changes in interest
rates and commodity prices. We do not hold or use derivative
nancial instruments for trading purposes.
Interest Rate Risk. We have interest rate risk relative to our
outstanding borrowings under our Credit Facility. At August 3,
2012, our outstanding borrowings under our Credit Facility
totaled $525,000 (see Note 5 to our Consolidated Financial
Statements). Loans under the Credit Facility bear interest, at
our election, either at the prime rate or LIBOR plus a
percentage point spread based on certain specied nancial
ratios. Our policy has been to manage interest cost using a
mix of xed and variable rate debt (see Notes 5, 6 and 10 to
our Consolidated Financial Statements). To manage this risk
in a cost ecient manner, we have entered into interest rate