Humana 2007 Annual Report Download - page 95

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted average fair value of each option granted during 2007, 2006, and 2005 is provided below. The
fair value was estimated on the date of grant using the Black-Scholes pricing model with the weighted average
assumptions indicated below:
2007 2006 2005
Weighted average fair value at grant date ........................ $21.07 $19.10 $12.93
Expected option life (years) ................................... 4.8 4.8 5.0
Expected volatility .......................................... 28.9% 31.6% 37.2%
Risk-free interest rate ........................................ 4.5% 4.6% 3.9%
Dividend yield ............................................. None None None
When valuing employee stock options, we stratify the employee population into homogenous groups that
historically have exhibited similar exercise behaviors. These groups include executive officers, directors, and all
other employees. We value the stock options based on the unique assumptions for each of these employee groups.
We calculate the expected term for our employee stock options based on historical employee exercise
behavior and base the risk-free interest rate on a traded zero-coupon U.S. Treasury bond with a term substantially
equal to the option’s expected term.
The volatility used to value employee stock options is based on historical volatility. We calculate historical
volatility using a simple average calculation methodology based on daily price intervals as measured over the
expected term of the option. We have consistently applied this methodology since our adoption of the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS 123. The decrease in the
historical volatility used to value our employee stock options is due to changes in the stock price pattern over the
past several years.
We base the risk-free interest rate on a traded zero-coupon U.S. Treasury bond with a term substantially
equal to the option’s expected term.
Activity for our option plans was as follows for the year ended December 31, 2007:
Shares Under
Option
Weighted
Average
Exercise Price
Options outstanding at December 31, 2006 ............... 7,286,011 $26.12
Granted ........................................... 1,015,786 63.79
Exercised .......................................... (3,002,465) 20.90
Forfeited .......................................... (219,903) 27.56
Options outstanding at December 31, 2007 ............... 5,079,429 $36.68
Shares
Under
Option
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value Per
Share(1)
Aggregate
Intrinsic
Value
($000)(1)
Options exercisable at December 31, 2007 ......... 2,733,028 $23.44 4.5 Years $52.03 $142,205
Options vested and expected to vest at December 31,
2007(2) ................................... 5,040,830 $36.50 4.8 Years $38.99 $196,547
(1) Computed based upon the amount by which the fair market value of our common stock at December 31,
2007 of $75.47 per share exceeded the weighted average exercise price.
(2) We began estimating forfeitures under SFAS 123R upon adoption on January 1, 2006.
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