Interpreting Disclosure on Employee Stock Options Assume Intel Corporation reported the following in its 2008 10-K report. Share-Based Compensation Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R) . . . Share-based compensation recognized in 2008 was $853 million ($952 million in 2007 and $1,375 million in 2006). We use the Black-Scholes option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire common stock granted under our stock purchase plan. We based the weighted average estimated values of employee stock option grants and rights granted under the stock purchase plan, as well as the weighted average assumptions used in calculating these values, on estimates at the date of grant, as follows: Stock Options 2008 2007 2006 Estimated fair values $ 5.74 $ 5.79 $ 5.21 Expected life (in years) 5.0 5.0 4.9 Risk-free interest rate 3.0% 4.5% 4.9% Volatility 37% 26% 27% Dividend yield 2.7% 2.0% 2.0% Additional information with respect to stock option activity is as follows: (In Millions, Except Per Share Amounts) Number of Shares Weighted Average Exercise Price December 31, 2005 899.9 $26.71 Grants 52.3 $20.04 Exercises (47.3) $12.83 Cancellations and forfeitures (65.4) $28.07 December 30, 2006 839.5 $26.98 Grants 24.6 $22.63 Exercises (132.8) $19.78 Cancellations and forfeitures (65.4) $31.97 December 29, 2007 665.9 $27.76 Grants 19.9 $20.81 Exercises (34.6) $19.42 Cancellations and forfeitures (42.8) $31.14 Expirations (2.4) $17.84 December 27, 2008 606.0 $27.81 (a) What did Intel expense for share-based compensation for 2008? Answer ($ million) How many options did Intel grant in 2008? Answer (million shares) Compute the fair value of all options granted during 2008. (Round your answer to one decimal place.) Answer ($ million) Why do the fair value of the option grants and the expense differ? The expense includes both the value of the options and the opportunity cost reflecting the higher price at which the shares could have been sold. The expense in 2008 is the cost of current and prior years' option grants that vest in the current year. The expense is net of tax and the fair value of the options is pretax. The expense is related to the current market price of the stock and the options are granted at historical costs. (b) Intel used the Black-Scholes formula to estimate fair value of the options granted each year. How did the change in volatility from 2007 to 2008 affect share-based compensation in 2008? What about the change in risk-free rate? The increase in the volatility estimate decreased share-based compensation expense and the decrease in the risk-free rate estimate increased compensation expense. The increase in the volatility estimate increased share-based compensation expense and the decrease in the risk-free rate estimate increased compensation expense. The increase in the volatility estimate increased share-based compensation expense and the decrease in the riskfree rate estimate decreased compensation expense. The increase in the volatility estimate decreased share-based compensation expense and the decrease in the risk-free rate estimate decreased compensation expense. (c) How many options were exercised during 2008? Answer million shares Estimate the cash that Intel received from its employees when these options were exercised. (Round your answer to one decimal place.) Answer ($ million) (d) What was the intrinsic value per share of the options exercised in 2008? (Hint: Assume that Intel grants options at-the-money.) $Answer per share If employees who exercised options in 2008 immediately sold them, what "profit" did they make from the shares? (Round your answer to one decimal place.) Answer ($ million) (e) The tax benefit that Intel will receive on the options exercised is computed based on the intrinsic value of the options exercised. Estimate Intel's tax benefit from the 2008 option exercises assuming a tax rate of 34.7%. (Round your answer to one decimal place.) Answer ($ million) (f) What was the average exercise price of the options that expired in 2008? $Answer per share Explain why employees might have let these options expire without exercising them. (Hint: Assume that Intel grants options at-the-money.) Employees might have felt that the stock price would increase in the future and preferred to wait to exercise their options. Employees might have chosen to receive their benefit in the form of compensation. Because the stock price was less than the strike price of the options, it was not economically rational for employees to exercise these options. Employees might have left the company.