Philips 2004 Annual Report Download - page 158
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In accordance with SFAS No. 123, the fair value of stock options granted is required to be based
upon a statistical option valuation model. Since the Company’s stock options are not traded on
any exchange, employees can receive no value nor derive any benefit from holding these stock
options without an increase in the market price of Philips’ stock. Such an increase in stock price
would benefit all shareholders commensurately.
The fair value of the Company’s 2004, 2003 and 2002 option grants was estimated using a
Black-Scholes option pricing model and the following weighted average assumptions:
2002 2003 2004
(EUR-denominated)
Risk-free interest rate 4.70% 3.49% 3.33%
Expected dividend yield 1.2% 1.6% 1.8%
Expected option life 5 yrs 5 yrs 5 yrs
Expected stock price volatility 53% 56% 48%
2002 2003 2004
(USD-denominated)
Risk-free interest rate 4.65% 3.08% 3.50%
Expected dividend yield 1.2% 1.7% 1.6%
Expected option life 5 yrs 5 yrs 5 yrs
Expected stock price volatility 49% 51% 47%
The assumptions were used for these calculations only and do not necessarily represent an
indication of Management’s expectations of future developments.
The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions, including the expected
stock price volatility. The Company’s employee stock options have characteristics significantly
different from those of traded options, and changes in the subjective input assumptions can
materially affect the fair value estimate.
157Philips Annual Report 2004