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This excerpt taken from the DIS 10-Q filed May 9, 2006. Equity
Based Compensation
The impact of stock options and restricted stock units (RSUs) on
net income is as follows:
Unrecognized compensation cost related to outstanding and
unvested stock options and RSUs totaled approximately
$376 million and $348 million, respectively as of
April 1, 2006.
On January 9, 2006, the Company made its regular annual
stock compensation grant which consisted of 19.6 million
stock options and 10.2 million RSUs, of which
1.6 million RSUs included market-based performance
conditions.
Prior to the fiscal 2006 annual grant, the fair value of options
granted was estimated on the grant date using the Black-Scholes
option pricing model. Beginning with the fiscal 2006 annual
grant, the Company has changed to the binomial valuation model.
The binomial valuation model considers certain characteristics
of fair value option pricing that are not considered under the
Black-Scholes model. Similar to the Black-Scholes model, the
binomial valuation model takes into account variables such as
volatility, dividend yield, and the risk free interest rate.
However, the binomial valuation model also considers the
expected exercise multiple (the multiple of exercise price to
grant price at which exercises are expected to occur on average)
and the termination rate (the probability of a vested option
being cancelled due to the termination of the option holder) in
computing the value of the option. Accordingly, the
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Table of Contents
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share
data)
Company believes that the binomial valuation model should
produce a fair value that is more representative of the value of
an employee option. In addition, the weighted average expected
option term assumption used by the Company for fiscal 2005
grants reflected the application of the simplified method set
out in SEC Staff Accounting Bulletin No. 107
(SAB 107). The simplified method defines the expected term
of an option as the average of the contractual term of the
options and the weighted average vesting period for all option
tranches. As SAB 107 only permits the use of the simplified
method until December 31, 2007, the Company would be
required to utilize a method other than the simplified method at
that time.
We utilized an expected volatility of 26% for fiscal 2006 grants
as compared to 27% for fiscal 2005 grants. The weighted average
fair values of options at their grant date during the six months
ended April 1, 2006 and April 2, 2005, were $7.12 and
$7.74, respectively.
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