Best Buy 2006 Annual Report Download - page 89

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$ in millions, except per share amounts
75
PART II
ESPP
The fair value of stock-based compensation expense associatedwith our ESPP was estimated on the purchase date using the
Black-Scholes option-pricing valuation model, with the following assumptions:
Valuation Assumptions
Feb. 25,
2006
Feb. 26,
2005
Feb. 28,
2004
Risk-free interest rate(1)3.5% 1.5% 1.0%
Expected dividend yield 0.8% 0.8% 0.0%
Expected stock pricevolatility (2)32%31% 39%
Expected life of ESPP options (in months)(3)6 6 6
(1)Based on the Treasury constant maturity interest rate whose term is consistent with the expected life of ESPP shares.
(2)Beginning in fiscal 2005, we use an outside valuation advisor to assist us in projecting expected stock pricevolatility. We consider
both the historical volatility of our stock price as well as implied volatilities from exchange-traded options on our stock. Prior tofiscal
2005, expected stock price volatility was based primarily on historical experience.
(3)Based on semi-annual purchase period.
In fiscal 2006 and 2005,1.1 million and 1.2million shares
were purchased through the ESPP. The weighted-average
purchase date fair value of ESPP shares purchased during
fiscal 2006 and 2005, was $9.13 and $8.50, respectively.
At February 25, 2006, andFebruary 26, 2005, ESPP
participants had accumulated approximately $18 and $13,
respectively, to purchase our common stock. There were no
shares purchased through the ESPP during fiscal 2004,
since the initial purchase period ended on April 1, 2004.
Earnings per Share
Basic earnings per share is computed based on the
weighted-average number of common shares outstanding.
Diluted earnings per share is computed based on the
weighted-average number of common shares outstanding
adjusted by the number of additional shares that would
have been outstanding had the potentially dilutive common
shares been issued. Potentially dilutive shares of common
stock include non-qualified stock options, nonvested share
awards and shares issuable under our ESPP, as well as
common shares that would have resulted from the assumed
conversion of our convertible debentures (see Note 4,
Debt). Since the potentially dilutive shares related to the
convertible debentures are included in the calculation, the
related interest expense, net of tax, is added back to
earnings from continuing operations, as the interest would
not have been paid if the convertible debentures were
converted to common stock.
At February 25, 2006, non-qualified stock options to purchase 32.3 million shares of common stock were outstanding as
follows (shares in millions):
Exercisable Unexercisable Total
Shares %Price Shares %Price Shares % Price
In-the-money 19.6 100 $26.60 7.4 58 $ 35.35 27.0 84 $ 29.00
Out-of-the-money — — NA 5.3 42 46.75 5.3 16 46.75
Total non-qualified stock options
outstanding 19.6 100 $26.60 12.7 100 $ 40.12 32.3 100 $ 3 1.93
The computation of dilutive shares outstanding excludes the
out-of-the-money non-qualified stock options because such
outstanding options’ exercise prices were greater than the
average market price of our common shares and, therefore,
the effect would be antidilutive (i.e., including such options
would result in higher earnings per share).