Sunoco 2007 Annual Report Download - page 65

SFAS No. 123R revised the accounting for stock-based
compensation required by Statement of Financial Ac-
counting Standards No. 123, “Accounting for Stock-
Based Compensation” (“SFAS No. 123”) (Note 1).
The stock options granted under LTPEP II have a 10-year
term, are not exercisable until two years after the date of
grant and permit optionees to purchase Company com-
mon stock at its fair market value on the date of grant.
Under SFAS No. 123, the fair value of the stock options
was estimated using the Black-Scholes option pricing
model. Use of this model requires the Company to make
certain assumptions regarding the term that the options
are expected to be outstanding (“expected life”), as well
as regarding the risk-free interest rate, the Company’s
expected dividend yield and the expected volatility of the
Company’s stock price during the period the options are
expected to be outstanding. The expected life and
dividend yield are estimated based on historical experi-
ence. The risk-free interest rate is based on the U.S.
Treasury yield curve at the date of grant for periods that
are approximately equal to the expected life. The Com-
pany uses historical share prices, for a period equivalent
to the options’ expected life, to estimate the expected
volatility of the Company’s share price. Under SFAS
No. 123R, the Company continues to use the Black-
Scholes option pricing model to estimate the fair value of
stock options. Such fair value has been based on the fol-
lowing weighted-average assumptions:
2007 2006 2005
Expected life (years) 555
Risk-free interest rate 3.5% 4.4% 4.5%
Dividend yield 1.7% 1.5% 1.0%
Expected volatility 29.0% 28.8% 27.7%
The following table summarizes information with respect to common stock option awards under Sunoco’s manage-
ment incentive plans:
Management Incentive Plans
(Dollars in Millions, Except Per-Share
and Per-Option Amounts)
Shares
Under
Option
Weighted-
Average
Option Price
Per Share
Weighted-
Average
Fair Value
Per Option*
Intrinsic
Value
Outstanding, December 31, 2004 2,767,088 $ 26.42
Granted 373,700 $ 77.54 $ 22.76
Exercised (1,612,482) $ 20.39 $77
Canceled —
Outstanding, December 31, 2005 1,528,306 $ 45.27
Granted 456,325 $ 68.72 $ 19.68
Exercised (658,190) $ 38.05 $20
Canceled (6,400) $ 52.61
Outstanding, December 31, 2006 1,320,041 $ 56.95
Granted 502,434 $64.19 $16.92
Exercised** (250,167) $31.26 $11
Canceled —
Outstanding, December 31, 2007 1,572,308*** $63.35 $16
Exercisable, December 31
2005 333,406 $ 18.94
2006 492,016 $ 30.47
2007 613,549*** $58.67 $10
* Represents the weighted-average fair value per option granted as of the date of grant.
** Cash received by the Company upon exercise totaled $6 million and the related tax benefit realized amounted to $5 million.
*** The weighted-average remaining contractual term of outstanding options and exercisable options was 8.4 and 6.9 years, respectively.
Common stock award units under the Company’s
management incentive plans mature upon completion of
a three-year service period or upon attainment of pre-
determined performance targets during the three-year
period. For performance-based awards, adjustments for
attainment of performance targets can range from 0-200
percent of the award grant. Awards are payable in cash or
common stock. Awards to be paid in cash are classified as
liabilities in the Company’s consolidated balance sheets
and are re-measured for expense purposes at fair value
each period (based on the fair value of an equivalent
number of Sunoco common shares at the end of the peri-
od) with any change in fair value recognized as an in-
crease or decrease in income. For service-based awards to
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