
This excerpt taken from the CSCO 10Q filed Nov 20, 2007. LatticeBinomial Model Upon adoption of SFAS 123(R), the Company began estimating the value of employee stock options and employee stock purchase rights on the date of grant using a latticebinomial model. Prior to the adoption of SFAS 123(R), the value of each employee stock option and employee stock purchase right was estimated on the date of grant using the BlackScholes model. The Company’s employee stock options have various restrictions including vesting provisions and restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity. Latticebinomial models are more capable of
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Table of Contentsincorporating the features of the Company’s employee stock options than closedform models such as the BlackScholes model. The use of a latticebinomial model requires extensive actual employee exercise behavior data and a number of complex assumptions including expected volatility, riskfree interest rate, expected dividends, kurtosis, and skewness. The weightedaverage assumptions, using the latticebinomial model, the weightedaverage expected life and estimated value of employee stock options and employee stock purchase rights are summarized as follows:
The determination of the fair value of sharebased payment awards on the date of grant using an optionpricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. The weightedaverage assumptions were determined as follows:
The expected life of employee stock options represents the weightedaverage period the stock options are expected to remain outstanding and is a derived output of the latticebinomial model. The expected life of employee stock options is impacted by all of the underlying assumptions and calibration of the Company’s model. The latticebinomial model assumes that employees’ exercise behavior is a function of the option’s remaining vested life and the extent to which the option is inthemoney. The latticebinomial model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and cancellations on all past option grants made by the Company. 