Western Digital 2007 Annual Report Download - page 70

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Stock Reserved for Issuance
The following table summarizes all shares of common stock reserved for issuance at June 29, 2007 (in millions):
Number
of Shares
Maximum shares issuable in connection with:
Outstanding awards and shares available for award grants ......................... 21.6
ESPP............................................................... 3.4
25.0
Fair Value Disclosure — Binomial Model
The fair value of stock options granted for the years ended June 29, 2007, June 30, 2006 and all options granted
between January 1, 2005 and July 1, 2005 was estimated using a binomial option pricing model. The binomial model
requires the input of highly subjective assumptions including the expected stock price volatility, the expected price
multiple at which employees are likely to exercise stock options and the expected employee forfeiture rate. The Company
uses historical data to estimate option exercise, employee termination, and expected stock price volatility within the
binomial model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant.
The fair value of stock options granted during the three years ended June 29, 2007 was estimated using the
following weighted average assumptions:
2007 2006 2005
Suboptimal exercise factor .............. 1.62 1.58 1.79
Range of risk-free interest rates .......... 4.48% to 5.12% 4.01% to 5.21% 3.34% to 4.46%
Range of expected volatility ............ 0.34 to 0.79 0.38 to 0.82 0.43 to 0.84
Weighted average expected volatility ...... .59 .67 .70
Post-vesting termination rate ........... 5.34% 14.00% 13.54%
Expected term (in years) ............... 5.34 4.32 3.82
Dividend yield...................... — — —
Fair value ......................... $8.18 $7.11 $4.86
Fair Value Disclosure — Black-Scholes-Merton Model
Pro forma information regarding net income and earnings per share is required by SFAS No. 123. This information
is required to be determined as if the Company had accounted for its stock options (including shares issued under the
Stock Incentive Plans and the ESPP, collectively called “Options”) granted subsequent to July 1, 1995, under the fair
value method of that statement.
The 2005 pro forma income per share information for all stock options granted on or prior to December 31, 2004 as
well as all ESPP shares granted on or prior to July 1, 2005 was estimated using the Black-Scholes-Merton option-pricing
model. The Black-Scholes-Merton option-pricing model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. The Black-Scholes-Merton option pricing model
requires the input of highly subjective assumptions such as the expected stock price volatility and the expected period
until options are exercised. The pro forma impact of applying SFAS No. 123 at June 29, 2007 is not necessarily
representative of future periods.
64
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)