Foot Locker 2008 Annual Report Download - page 77

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61
Valuation Model and Assumptions
The Company uses a Black-Scholes option-pricing model to estimate the fair value of share-based awards under
SFAS No. 123(R). The Black-Scholes option-pricing model incorporates various and highly subjective assumptions,
including expected term and expected volatility.
The Company estimates the expected term of share-based awards granted using the Company’s historical exercise
and post-vesting employment termination patterns, which it believes are representative of future behavior. The
expected term for the Company’s employee stock purchase plan valuation is based on the length of each purchase
period as measured at the beginning of the offering period, which is one year. The Company estimates the expected
volatility of its common stock at the grant date using a weighted-average of the Company’s historical volatility and
implied volatility from traded options on the Company’s common stock. The Company believes that the combination
of historical volatility and implied volatility provides a better estimate of future stock price volatility. The risk-free
interest rate assumption is determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds
with maturities similar to those of the expected term of the award being valued. The expected dividend yield is derived
from the Company’s historical experience. Additionally, SFAS No. 123(R) requires the Company to estimate pre-vesting
option forfeitures at the time of grant and periodically revise those estimates in subsequent periods if actual forfeitures
differ from those estimates. The Company records stock-based compensation expense only for those awards expected
to vest using an estimated forfeiture rate based on its historical pre-vesting forfeiture data.
Compensation expense related to the Company’s stock option and stock purchase plans was $3.6 million, $4.5
million and $6.3 million for 2008, 2007, and 2006, respectively. The following table shows the Company’s assumptions
used to compute the stock-based compensation expense:
Stock Option Plans Stock Purchase Plan
2008 2007 2006 2008 2007 2006
Weighted-average risk free rate
of interest ................ 2.43% 4.43% 4.68% 4.16% 5.00% 4.39%
Expected volatility ............ 37% 28% 30% 27% 22% 22%
Weighted-average expected
award life ................ 4.6 years 4.2 years 4.0 years 1.0 year 1.0 year 1.0 year
Dividend yield ............... 5.1% 2.3% 1.5% 2.8% 2.0% 1.4%
Weighted-average fair value ..... $2.49 $5.28 $6.36 $7.80 $4.96 $4.71
The information set forth in the following table covers options granted under the Company’s stock option plans:
2008 2007 2006
Number
of
Shares
Weighted-
Average
Exercise
Price
Number
of
Shares
Weighted-
Average
Exercise
Price
Number
of
Shares
Weighted-
Average
Exercise
Price
(in thousands, except prices per share)
Options outstanding at beginning
of year ............................. 5,977 $19.57 6,048 $19.15 5,962 $18.45
Granted .............................. 588 $11.73 778 $22.38 858 $23.98
Exercised ............................. (81) $ 9.76 (474) $15.29 (459) $15.12
Expired or cancelled ..................... (404) $24.12 (375) $23.99 (313) $24.83
Options outstanding at end of year .......... 6,080 $18.64 5,977 $19.57 6,048 $19.15
Options exercisable at end of year ........... 4,812 $18.89 4,530 $18.27 4,455 $16.94
Options available for future grant at end
of year ............................. 4,890 5,804 4,931
The total intrinsic value of options exercised in 2008 was not significant and in 2007 was $2.7 million. The
aggregate intrinsic value for stock options outstanding and for stock options exercisable as of January 31, 2009 was not
significant. The intrinsic value for stock options outstanding and exercisable is calculated as the difference between
the fair market value as the end of the period and the exercise price of the shares. The Company received $0.8 million
and $6.9 million in cash from option exercises for 2008 and 2007, respectively. The tax benefit realized by the Company
on the stock option exercises for 2008 was not significant.