Express 2011 Annual Report Download - page 58

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Description of Policy Judgments and Uncertainties
Effect if Actual Results Differ from
Assumptions
Share-based Payments
Our share-based payments related to
stock options are estimated using the
Black-Scholes-Merton option-pricing
model to determine the fair value of
the stock option grants, which require
us to estimate the expected term and
the expected stock price volatility
over the expected term.
Our accounting methodology for
calculating share-based payments
contains uncertainties because it
requires management to make
assumptions and judgments to
determine the fair value of our
awards. The primary assumptions
used in the valuation of the stock
options are the expected term of
the option and the future volatility
of our stock price.
As we have limited history as a
public company, we have elected
to utilize the SEC’s simplified
method for calculation of our
expected term, which takes a
significant amount of judgment
out of this assumption. Our
volatility was estimated using
comparable companies’ volatility
over a similar expected term.
We have no reason to believe that
the future volatility of our stock
will be materially different from
the estimate used in valuing our
awards.
A 10% increase in volatility would
yield an approximate 7% increase
in the Black-Scholes-Merton
valuation for stock options.
Related Party Transactions
See Note 7 to our Consolidated Financial Statements for a description of our related party transactions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our Opco Revolving Credit Facility bears interest at variable rates. See Note 9 of our Consolidated Financial
Statements for further information on the calculation of the rates. We did not borrow any amounts under the
Opco Revolving Credit Facility during 2011. Borrowings under our Senior Notes bear interest at a fixed rate. For
fixed rate debt, interest rate changes affect the fair value of such debt, but do not impact earnings or cash flow.
Changes in interest rates are not expected to have a material impact on our future earnings or cash flows given
our limited exposure to such changes.
Foreign Currency Exchange Risk
All of our purchases are denominated in US dollars, therefore we are not exposed to foreign currency exchange
risk on these purchases. However, we currently operate six stores in Canada and the functional currency of our
Canadian operations is the Canadian dollar. Our Canadian operations have intercompany accounts with our U.S.
subsidiaries that eliminate upon consolidation, but the transactions resulting in such accounts do expose us to
foreign currency exchange risk. We do not utilize hedging instruments to mitigate foreign currency exchange
risks. A hypothetical 10% change in the Canadian foreign exchange rate would not materially affect our results
of operations or cash flows.
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