ing Disclosure on Employee Stock Options (LO1) orporation reported the following

Question

ing Disclosure on Employee Stock Options (LO1) orporation reported the following in its 2012 10-K report Share-Based Compensation Share-based compensation recognized in 2012 was $1.1 billion ($1.1 billion in 2011 and $917 milion in 2010) . Dunng 2012, the tax benefit that we realized for the tax deduction from share-based awards totaled $510 million ($327 million in 2011 and $266 million in 2010)... . 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 stock granted under our stock purchase plan. We based the weighted average estimated value of employee st option grants and rights granted under the stock purchase plan, as well as the weighted average assumptions used in calculating the fair value, on estimates at the date of grant, as follows: Stock Options Stock Purchase Plan 2012 2011 2010201220112010 Estimated values ....$4.22 $3.91 $4.82 $5.47 $4.69 $4.71 0.5 0.5 0.5 Risk-free interest rate 1.0% 2.2% 2.5% 0.1% 0.2% 0.2% Volatility 25% 27% 28% 24% 26% 32% Dividend yield 3.3% 3.4% 2.7% 3.3% 3.6% 3.1% 4.9 22 5A 2.5 Expected life (in years). 5.3 5.3 5.4 Additional information with respect to stock option activity is as follows: Weighted Average Exercise Price Number of Options 451.3 20.2 (16.6) (In millions, except per option amounts) Grants. Exercises Cancellations and forfeitures Expirations $25.08 $23.25 $18.36 $24.76 $60.68 (52.4) 386.4 14.7 12.0 (86.3) $20.45 $21.49 $15.80 $20.06 $20.47 $24.85 Grants. Assumed in acquisition Exercises (8.6) Cancellations and forfeitures (19.9) cont

Explanation / Answer

Part A)

The total value of share-based compensation expensed by Intel during 2012 was $1.1 billion. The company had granted 13.5 million having a face value of $4.22 per share. Therefore, the total value of options granted during the year was $56.97 million (13.5*4.22). The value of share-based compensation expense comprises of the fair value of options that were granted in 2012 and also in earlier years spread over the vesting period. Compensation relating to stock purchase plan and any other form of shared-based compensation are also included in the value of this share-based compensation expense. This causes the difference in the value of option grants and expense.

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Part B)

The fair value when estimated with Black-Scholes increases with volatlity and risk free-rate. The volatility had decresed marginallly from 27% in 2012 to 25% in 2011. Similarly, the risk-free rate has declined from 2.2% in 2012 to 1% in 2011. If the company had used the same inputs in 2012 for Black-Scholes as for the Year 2011, it would have resulted in a higher fair value of options that were granted in 2012 resulting in a higher compensation expense.

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Part C)

The total number of options exercised during 2012 were 85.8 million shares at an average exercise price of $20.45 resulting in a total cash flow of $1.7546 billion (85.8*20.45)from employees.

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Part D)

The intrinsic value per share of the options (exercised in 2012) would be the same or close to the average exercise price of options granted during 2012 which is $27.01. It is so because Intel grants options at-the money. The total profit made by the employees would be equal to $562.85 million [85.8*(27.01 - 20.45)] in 2012.

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Part E)

The value of tax-benefit is calculated as follows:

Value of Tax-Benefit = (Intrinsic Value - Exercise Price)*(Option Exercised)*(Tax Rate) = (27.01 - 20.45)*(85.8)*(37%) = $208.25

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Part F)

The average exercise price of the $19.3 million options expired in 2012 was $22.45. The employees would have made a net profit of $4.56 per share (27.01 - 22.45) had they exercised the options. By letting the options expire, that have lost a benefit of $4.56 per share. The options should not have been exercised or should have been allowed to expire if the average stock price was less than the exercise price.

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