Western Digital 2015 Annual Report Download - page 81

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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
SARs Activity
The Company recognized a benefit of $3 million in 2015, and $36 million and $46 million in expense related to
adjustments to market value as well as the vesting of SARs in 2014 and 2013, respectively. No tax benefit was real-
ized in 2015 as a result of the aforementioned SARs expense, as compared to tax benefits realized of $7 million and $4
million in 2014 and 2013, respectively. The SARs will be settled in cash upon exercise. The Company had a total
liability of $41 million related to SARs included in accrued liabilities as of July 3, 2015 in the consolidated balance
sheet.
The share-based compensation liability for SARs is recognized for the portion of fair value for which service has
been rendered at the reporting date. The share-based liability is remeasured at each reporting date, using a binomial
option-pricing model, through the requisite service period. As of July 3, 2015, 0.6 million SARs were outstanding
with a weighted average exercise price of $7.92. There were no SARs granted in 2015, 2014 and 2013, and all other
SARs activity was immaterial to the consolidated financial statements for the year ended July 3, 2015.
Fair Value Disclosure — Binomial Model
The fair value of stock options granted is estimated using a binomial option-pricing model. The binomial model
requires the input of highly subjective assumptions. The Company uses historical data to estimate 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 July 3, 2015 was estimated using the following weighted average
assumptions:
2015 2014 2013
Suboptimal exercise factor ................ 2.52 2.07 1.90
Range of risk-free interest rates ............ 0.11% to 2.16% 0.10% to 2.44% 0.14% to 1.96%
Range of expected stock price volatility ...... 0.23 to 0.47 0.27 to 0.50 0.36 to 0.53
Weighted average expected volatility ....... 0.36 0.43 0.49
Post-vesting termination rate ............. 1.25% 3.10% 2.16%
Dividend yield ........................ 1.69% 1.58% 2.53%
Fair value ............................ $32.19 $24.14 $15.75
The weighted average expected term of the Company’s stock options granted during 2015, 2014 and 2013 was
5.8 years, 5.0 years and 4.0 years, respectively.
Fair Value Disclosure — Black-Scholes-Merton Model
The fair value of ESPP purchase rights issued is estimated at the date of grant of the purchase rights using the
Black-Scholes-Merton option-pricing model. 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. Purchase rights under the ESPP are granted on either June 1st or December 1st of each year.
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