. . . and Now
Beginning after January 1, 2006, the Financial Accounting Standards Board (FASB) has required companies to expense stock options using the fair value method. Under this approach, compensation expense is measured by the fair value of stock options on their grant date and is recognized over their vesting period (see Advanced Discussion box).
The fair value of stock options is estimated using an option-pricing model, and its underlying assumptions are disclosed in footnotes of the companies’ 10-K (Exhibit A.2).
| On February 1,2003, the Company adopted the expense recognition provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), restating results for prior periods. In December 2004, the Financial Accounting Standards Board issued a revision of SFAS 123 (“SFAS 123(R)”). The Company adopted the provisions of SFAS 123(R) upon its release. The adoption of SFAS 123(R) did not have a material impact on our results of operations, financial position or cash flows. All share-based compensation is accounted for hi accordance with the fair-value based method of SFAS 123(R).
The Company’s Stock Incentive Plan of 2005 (the “Plan”), which is shareholder-approved, permits the grant of stock options, restricted (non-vested) stock and performance share compensation awards to its associates for up to 210 million shares of common stock. The Company believes that such awards better align the interests of its associates with those of its shareholders. Under the Plan and prior plans, stock option awards have been granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Generally, outstanding options granted before fiscal 2001 vest over seven years. Options granted after fiscal 2001 generally vest over five years. Shares issued upon the exercise of options are newly issued. Options granted generally have a contractual term of 10 years. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes-Merton option valuation model that uses various assumptions for inputs, which are noted in the following table. Generally, the Company uses historical volatilities and risk free interest rates that correlate with the expected term of the option. To determine the expected life of the option, the Company bases its estimates on historical grants with similar vesting periods. The following tables represents a weighted-average of the assumptions used by the company to estimate the fair values of the Company’s stock options at the grant dates: | |||
| Fiscal Year Ended January 31, | 2006 | 2005 | 2004 |
| Dividend yield | 1.9% | 1.1% | 0.9% |
| Volatility | 24.9% | 26.2% | 32.3% |
| Risk-free interest rate | 4.2% | 3.5% | 2.8% |
| Expected life in years | 6.1 | 5.3 | 4.5 |
Source: Used with permission of Wal-Mart Inc.
Advanced Discussion: Estimating Fair Value of Stock OptionsThe fair value of stock options is estimated using an option-pricing model, most frequently the Black-Scholes-Merton option valuation model. This model requires the input of highly subjective assumptions, including:
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