Target 2007 Annual Report Download - page 59

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The Black-Scholes valuation model was used to estimate the fair value of the options at grant date based
on the assumptions noted in the following table. Volatility represents an average of market quotes for implied
volatility of 5.5-year options on Target common stock. The expected life is estimated based on an analysis of
options already exercised and any foreseeable trends or changes in behavior. The risk-free interest rate is an
interpolation of the relevant U.S. Treasury security maturities as of each applicable grant date. The
assumptions disclosed below represent a weighted average of the assumptions used for all of our stock
option grants throughout the year.
Valuation of Share-Based Compensation 2007 2006 2005
Stock option valuation assumptions:
Dividend yield 1.1% 0.8% 0.7%
Volatility 39% 23% 27%
Risk-free interest rate 3.2% 4.7% 4.4%
Expected life in years 5.5 5.5 5.5
Grant date weighted average fair value $18.08 $16.52 $16.85
Performance share units grant date weighted average fair
value $59.45 $49.98 $53.96
Restricted stock units grant date weighted average fair value $57.70 $57.60 —
Compensation expense recognized in Statements of
Operations (pretax, millions) $73 $99 $93
Related income tax benefit (millions) $28 $39 $37
Compensation realized upon option exercises (pretax,
millions) $ 187 $ 142 $ 180
Related income tax benefit (millions) $73 $56 $71
As of February 2, 2008, there was $141 million of total unrecognized compensation expense related to
nonvested stock options. That cost is expected to be recognized over a weighted average period of 1.5 years.
The weighted average remaining life of currently exercisable options is 5.1 years, and the weighted average
remaining life of all outstanding options is 6.8 years.
Holders of performance share units will receive shares of our common stock if we meet certain EPS and
revenue growth targets and the holders also satisfy service-based vesting requirements. Compensation
expense associated with outstanding performance share units is recorded over the life of the awards. The
amount of expense recorded each period is dependent upon our estimate of the number of shares that will
ultimately be issued and, for some awards, the current Target common stock price. Future compensation
expense for currently outstanding awards could range from a credit of $54 million for previously recognized
amounts up to a maximum of approximately $56 million of expense assuming full payout under all outstanding
awards.
Total unrecognized compensation expense related to restricted stock unit awards was $8 million as of
February 2, 2008.
26. Defined Contribution Plans
Team members who meet certain eligibility requirements can participate in a defined contribution 401(k)
plan by investing up to 80 percent of their compensation, as limited by statute or regulation. Generally, we
match 100 percent of each team member’s contribution up to 5 percent of total compensation. Our
contribution to the plan is initially invested in Target common stock. These amounts are free to be diversified
by the team member immediately.
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PART II