Question

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 $852 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	27.9	$21.81
Exercises	(38.6)	$19.42
Cancellations and forfeitures	(42.8)	$31.14
Expirations	(2.4)	$25.84
December 27, 2008	610.0	$27.79

(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 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 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 is related to the current market price of the stock and the options are granted at historical costs.

1.00 points out of 1.00

(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 decreased compensation expense.

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 decreased 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.

1.00 points out of 1.00

(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)

Answer 1

Requirement A:

1. The amount of share-based compensation expensed during the fiscal 2008 is $852 million.

2. The company granted 27.9 million shares.

3. The total fair value of the options granted is 608.5 million (27.9 million shares × $21.81 per share).

4. The expense is a combination of both current year and prior years’ cost of options granted and vested in the current year and therefore the correct option is “A”.

Requirement B:

1. The volatility of the options estimate is 37% in fiscal 2008 when compared to 26% of fiscal 2007 and therefore there is an increase in fair value of options granted and as result there is an increase in compensation expense. On the other hand, the estimated risk-free interest rate decreased in fiscal 2008 to 3% when compared to 4.5% of 2007 as result both compensation expense and the fair value of options granted decreased. The correct option is “C: The increase in the volatility estimate increased share-based compensation and the decrease in the risk-free rate estimate decreased compensation expense”.

Requirement C:

1. The number of options exercised during the fiscal 2008 is 38.6 million shares.

2. The amount of cash received when the employees exercised options is $749.6 million (38.6 million shares × $19.42 per share).

Requirement D:

1. The intrinsic value per share is 2.39 ($21.81 − $19.42) per share and it is the difference between average exercise price and average stock price during the fiscal 2008.

2. The total amount of profit is 92.3 million (38.6 million shares × $2.39 per share).

Requirement E:

1. The tax benefit is $32.0 million ($92.3 million × 34.7%).