Interpreting Disclosure on Employee Stock Options
GIVENS:
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
REQUIRED:
(d) What was the intrinsic value per share of the options exercised in 2008? (Hint: Assume that Intel grants options at-the-money.)
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.)
(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.)