Express 2010 Annual Report Download - page 101

The following table illustrates the assumptions used in the Black-Scholes-Merton pricing model for the restricted
shares:
2009 2008
Risk-free interest rate ............................. 0.20 % 1.69 %
Asset volatility .................................. 50% 40%
Time to liquidity event ........................... 7months 2-3 years
Marketability discount ............................ 10% 34%
Equity dividend yield ............................. — —
Risk-free interest rate—This is an interpolated rate from the U.S. constant maturity treasury rate for a term
corresponding to the time to liquidity event, as described below. An increase in the risk-free interest rate will
increase compensation expense.
Asset volatility—This is a measure of the amount by which the price of various comparable companies common
stock has fluctuated or is expected to fluctuate, as the Company’s common stock was not publicly-traded. The
comparable companies were selected by analyzing public companies in the industry based on various factors
including, but not limited to, company size, financial data availability, active trading volume, and capital
structure. An increase in the expected volatility will increase compensation expense.
Time to liquidity event—This is the period of time over which the underlying equity shares are expected to
remain outstanding. An increase in the expected term will increase compensation expense.
Marketability discount—This is a measure of the amount by which the value of the underlying equity shares
units is reduced as the value of privately-held shares is not directly comparable to the value of publicly-traded
shares of similar common stock. An increase in the marketability discount will decrease compensation expense.
The Finnerty Model was utilized to calculate a discount on the underlying equity shares. The Finnerty Model
provides for a valuation discount reflecting the holding period restriction embedded in a restricted stock
preventing its sale over a certain period of time.
The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by
using an option pricing theory. This model has gained recognition through its ability to address the magnitude of
the discount by considering the volatility of a company’s stock price and the length of restriction. The concept
underpinning the Finnerty Model is that restricted stock cannot be sold over a certain period of time. Further
simplified, a restricted share of equity in a company can be viewed as having forfeited a put on the average price
of the marketable equity over the restriction period (also known as an “Asian Put Option”). If an Asian Put
Option is priced and compared to that of the assumed fully marketable underlying stock, the marketability
discount can be effectively estimated.
The assumptions utilized in the model included (i) length of holding period of seven months and two years for
2009 and 2008, respectively, (ii) equity volatility of 80% for 2009 and 2008, (iii) dividend yield of zero for each
period, and (iv) risk free rate of 0.20% and 1.43% for 2009 and 2008, respectively.
The restricted shares vest over four years in equal 25% increments each year and have pro-rata vesting for each
quarter elapsed since the prior annual vesting date.
11. Earnings Per Share
The weighted-average shares used to calculate basic and diluted net income (loss) per share has been
retroactively adjusted based on the Reorganization (see Note 1).
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