Mattel 2006 Annual Report Download - page 59

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model. The expected life of the options used in this calculation is the period of time the options are expected to
be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is
based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected
dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is
based on the implied yield available on US Treasury zero-coupon issues. Judgment is also required in estimating
the amount of share-based awards that will be forfeited prior to vesting.
The following weighted average assumptions were used in determining fair value for options granted:
2006 2005 2004
Expected life (in years) ................................................. 5.1 4.9 6.3
Risk-free interest rate ................................................... 4.9% 4.1% 4.0%
Volatility factor ....................................................... 28.0% 27.6% 38.5%
Dividend yield ........................................................ 2.8% 2.4% 1.2%
Weighted average fair value per granted option .............................. $4.51 $4.56 $6.67
The following table summarizes the sensitivity of valuation assumptions within the calculation of stock
option fair values, if all other assumptions are held constant:
Increase in
Assumption
Factor
Increase
(Decrease)
in Fair
Value
(in % pts)
Expected life (in years) .................................................... 1year 7.1
Risk-free interest rate ..................................................... 1% 7.1
Volatility factor .......................................................... 1% 2.9
Dividend yield ........................................................... 1% (11.5)
(Decrease) in
Assumption
Factor
Increase
(Decrease)
in Fair
Value
(in % pts)
Expected life (in years) .................................................... (1)year (8.4)
Risk-free interest rate ..................................................... (1)% (6.9)
Volatility factor .......................................................... (1)% (2.7)
Dividend yield ........................................................... (1)% 12.6
On December 28, 2005, the Compensation Committee of the Board of Directors of Mattel approved the
acceleration of vesting of options for approximately 12.4 million shares with an exercise price of $16.09 or
greater granted to employees other than Mattel’s Chairman and Chief Executive Officer. Vesting was not
accelerated for stock options held by any member of the Board of Directors. The primary purpose of the
accelerated vesting was to avoid recognizing future compensation expense associated with the accelerated stock
options under SFAS No. 123(R). Additionally, for financial reporting purposes, there may be other potential tax
benefits derived from accelerating the vesting of stock options. Due to the acceleration of vesting in 2005, future
share-based payment grants are expected to impact Mattel’s consolidated statements of operations more
significantly than in the current period. For those future grants, different valuation assumptions, or actual
forfeitures differing significantly from estimated forfeitures, could have a material effect on Mattel’s future
financial statements. Additionally, Mattel is evaluating the types of share-based payment awards it grants to
employees and different types of share-based payment awards may be granted in the future.
In addition to a $19.3 million pre-tax charge during 2006 for prior period unintentional stock option
accounting errors (see Item 8. “Financial Statements and Supplementary Data—Note 7 to the Consolidated
Financial Statements”), Mattel recognized compensation expense of $4.6 million for stock options during the
50