Southwest Airlines 2007 Annual Report Download - page 72

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The fair value of each option grant is estimated on the date of grant using a modified Black-Scholes option pricing
model. The following weighted-average assumptions were used for grants made under the fixed option plans for the
current and prior years:
2007 2006 2005
Weighted-average risk-free interest rate ............................... 3.7% 4.6% 4.1%
Expected life of option (years) ..................................... 4.9 5.0 4.7
Expected stock volatility.......................................... 25.7% 26.0% 26.2%
Expected dividend yield .......................................... 0.09% 0.07% 0.09%
The Black-Scholes option valuation model was
developed for use in estimating the fair value of short-
term traded options that have no vesting restrictions and
are fully transferable. In addition, option valuation models
require the input of somewhat subjective assumptions
including expected stock price volatility. For 2007 and
2006, the Company has relied on observations of both
historical volatility trends as well as implied future vol-
atility observations as determined by independent third
parties. For both 2007 and 2006 stock option grants, the
Company utilized expected volatility based on the
expected life of the option, but within a range of 24 per-
cent to 27 percent. Prior to 2006, the Company relied
exclusively on historical volatility as an input for deter-
mining the estimated fair value of stock options. In
determining the expected life of the option grants, the
Company has observed the actual terms of prior grants
with similar characteristics, the actual vesting schedule of
the grant, and assessed the expected risk tolerance of
different optionee groups. The risk-free interest rates
used, which were actual U.S. Treasury zero-coupon rates
for bonds matching the expected term of the option as of
the option grant date, ranged from .50 percent to
5.37 percent for the year ended December 31, 2007,
from 4.26 percent to 5.24 percent for 2006, and from
3.37 percent to 4.47 percent for 2005.
The fair value of options granted under the fixed
option plans during the year ended December 31, 2007,
ranged from $0.67 to $6.33, with a weighted-average fair
value of $4.28. The fair value of options granted under the
fixed option plans during 2006 ranged from $2.48 to
$6.99, with a weighted-average fair value of $5.47. The
fair value of options granted under the fixed option plans
during 2005 ranged from $2.90 to $6.79, with a
weighted-average fair value of $4.49.
Aggregated information regarding the Company’s fixed stock option plans is summarized below:
Options (000)
Wtd. Average
Exercise Price
Wtd. Average
Remaining
Contractual Term
Aggregate Intrinsic
Value (Millions)
Collective Bargaining Plans
Outstanding December 31, 2004 .......... 120,703 $10.98
Granted .......................... 1,697 14.91
Exercised ......................... (14,739) 6.13
Surrendered ....................... (2,417) 13.89
Outstanding December 31, 2005 .......... 105,244 $11.65
Granted .......................... 1,025 16.64
Exercised ......................... (24,632) 7.91
Surrendered ....................... (1,427) 14.25
Outstanding December 31, 2006 .......... 80,210 $12.83
Granted .......................... 751 14.89
Exercised ......................... (14,145) 7.17
Surrendered ....................... (3,440) 16.11
Outstanding December 31, 2007 .......... 63,376 $13.93 3.8 $2
Vested or expected to vest at December 31,
2007 ............................ 63,254 $13.93 3.8 $2
Exercisable at December 31, 2007 ......... 62,442 $13.92 3.8 $2
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)