El Pollo Loco 2016 Annual Report Download - page 44

Theseareselectedbasedonsimilaritiesofsizeandotherfinancialandoperationalcharacteristics.Volatilityiscalculatedwithreferencetothehistoricaldaily
closingequitypricesofourpeercompanies,priortothegrantdate,overaperiodequaltotheexpectedterm.Wecalculatetherisk-freeinterestrateusingthe
impliedyieldforaU.S.Treasurysecuritywithconstantmaturityandaremainingtermequaltotheexpectedtermofouremployeestockoptions.Wedonot
anticipatepayinganycashdividendsfortheforeseeablefutureandthereforeuseanexpecteddividendyieldofzeroforoptionvaluationpurposes.
Thefollowingtablesummarizestheassumptionsrelatingtoourstockoptionsforfiscal2015,2014,and2013.

 Fiscal Year
2015 2014 2013
Risk-freeinterestrates   —  1.70%to1.72%  1.15%to1.99%
Expectedterm   —  5.75years  6.25years
Expecteddividendyield   —  0%  0%
Volatility   —  32.4%to41.0%  40.6%

Ifinthefuturewedeterminethatanothermethodismorereasonable,orifanothermethodforcalculatingtheseinputassumptionsisprescribedbyauthoritative
guidance,and,therefore,shouldbeusedtoestimatevolatilityorexpectedlife,thefairvaluecalculatedforourstockoptionscouldchangesignificantly.Higher
volatilityandlongerexpectedlivesresultinanincreasetostock-basedcompensationexpensedeterminedatthedateofgrant.Stock-basedcompensationexpense
affectsourgeneralandadministrativeexpense.
Weestimateourforfeitureratebasedonananalysisofouractualforfeituresandwillcontinuetoevaluatetheappropriatenessoftheforfeitureratebasedonactual
forfeitureexperience,analysisofemployeeturnoverbehavior,andotherfactors.Changesintheestimatedforfeitureratecanhaveasignificanteffectonreported
stock-basedcompensationexpense,asthecumulativeeffectofadjustingtherateforallexpenseamortizationisrecognizedintheperiodtheforfeitureestimateis
changed.Ifarevisedforfeiturerateishigherthanthepreviously-estimatedforfeiturerate,anadjustmentismadethatwillresultinadecreasetothestock-based
compensationexpenserecognizedinthefinancialstatements.Ifarevisedforfeiturerateislowerthanthepreviously-estimatedforfeiturerate,anadjustmentis
madethatwillresultinanincreasetothestock-basedcompensationexpenserecognizedinthefinancialstatements.Theeffectofforfeitureadjustmentswas
insignificantinfiscal2014,and2013.Wewillcontinuetousesignificantjudgmentinevaluatingtheexpectedterm,volatility,andforfeitureraterelatedtoour
stock-basedcompensation.
Recent Accounting Pronouncements
RecentaccountingpronouncementsaredescribedinNote2toourconsolidatedfinancialstatementsincludedelsewhereinthisreport.
Key Financial Definitions
Revenue
Ourrevenueisderivedfromtwoprimarysources:company-operatedrestaurantrevenueandfranchiserevenue,thelatterofwhichiscomprisedprimarilyof
franchiseroyaltiesand,toalesserextent,franchisefeesandsubleaserentalincome.
Food and Paper Costs
Foodandpapercostsincludethedirectcostsassociatedwithfood,beverageandpackagingofourmenuitems.Thecomponentsoffoodandpapercostsare
variableinnature,changewithsalesvolume,areimpactedbymenumix,andaresubjecttoincreasesordecreasesincommoditycosts.
Labor and Related Expenses
Laborandrelatedexpensesincludewages,payrolltaxes,workers’compensationexpense,benefits,andbonusespaidtoourrestaurantmanagementteams.Like
otherexpenseitems,weexpectlaborcoststogrowproportionatelyasourrestaurantrevenuegrows.Factorsthatinfluencelaborcostsincludeminimumwageand
payrolltaxlegislation,thefrequencyandseverityofworkers’compensationclaims,healthcarecosts,andtheperformanceofourrestaurants.
Occupancy Costs and Other Operating Expenses
Occupancycostsincluderent,commonareamaintenance,andrealestatetaxes.Otherrestaurantoperatingexpensesincludethecostsofutilities,advertising,credit
cardprocessingfees,restaurantsupplies,repairsandmaintenance,andotherrestaurantoperatingcosts.
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