First Data 2008 Annual Report Download - page 171

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expected volatility—The Company used implied volatility to estimate the grant-date fair value of stock options and ESPP rights. The Company
calculated implied volatility on a daily basis using the Black-Scholes option pricing model. This calculation incorporated the market prices of a variety of
traded options, the market price of the Company's stock, the exercise price and remaining term of the traded options, the expected dividends, and the risk-free
rate. The traded options used were similar in exercise price to awards granted to employees, were near-the-money, and typically had a remaining maturity of
greater than one year. For each grant, the Company used the average of the daily implied volatilities for the six months preceding the grant date. For grants
made after the Western Union spin-off, the Company used the average of the daily implied volatility for the period between the spin-off and the grant date.
Expected dividend yield—The dividend yield was the calculation of a rolling 12 month average stock price divided by the annualized dividend amount.
Expected term—The Company aggregated stock option awards into classes. For each class, the expected term was primarily based on the results of a
study performed on the historical exercise and post-vesting employment termination behavior for similar grants. The expected terms were as follows: 4.5 year
life for employees (Non-Board of Directors, Non-Executives), 7 year life for the Board of Directors and 7.5 year life for the Executive Committee. The
expected term of ESPP rights was 0.25 years as purchase rights were achieved over the course of the quarter in which the employee participated in the
employee stock purchase plan. Once the shares were purchased, the employee could sell their respective shares.
Risk-free interest rate—The risk-free rate for stock options granted during the period was determined by using a zero-coupon U.S. Treasury rate for the
period that coincided with the expected terms listed above. The risk-free rate for ESPP rights was determined by using a 3-month maturity U.S. Treasury
bond.
The total intrinsic value of stock options exercised during the predecessor periods from January 1, 2007 through September 24, 2007 and for the year
ended December 31, 2006 was $86.2 million (excluding the value of stock options accelerated upon the closing of the merger and then cancelled with a right
to receive cash) and $310.4 million, respectively.
The Company received $187.4 million and $729.8 million in cash proceeds related to the exercise of stock options and ESPP purchases during the
predecessor periods from January 1, 2007 through September 24, 2007 and the year ended December 31, 2006, respectively. In addition, the Company
realized total tax benefits from stock option exercises (and in 2007 the right to receive cash upon the accelerated vesting at the time of the merger) of $224.8
million and $122.9 million during the predecessor periods from January 1, 2007 through September 24, 2007 and for the year ended December 31, 2006,
respectively, which were recorded as increases to the "Additional paid-in capital" line item of the Consolidated Balance Sheets.
For the predecessor periods from January 1, 2007 through September 24, 2007 and the year ended December 31, 2006, the excess tax benefit from
stock-based compensation awards of $219.8 million and $124.2 million, respectively, was reflected as a use of cash in cash flows provided by operating
activities and a source of cash in cash flows used in financing activities in the Consolidated Statements of Cash Flows. The excess tax benefit from stock-
based payment arrangement related to the exercise of stock options and restricted stock held by FDC employees was $13.1 million for the year ended
December 31, 2008.
The Company calculated its pool of excess tax benefits available to absorb write-offs of deferred tax assets in subsequent periods. At December 31,
2006, the balance of this pool was approximately $193 million. The pool of excess tax benefits was eliminated due to the merger.
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