Notes To Consolidated Financial Statements 2004  2003  2002 Fair value per stock option $15.15  $10.30  $7.89 Risk-free interest rate  3.7%  3.8%  5.0% Expected volatility rate  49%  47%  47% Expected life of options (in years)  6  7  7 Assumed annual dividend  $ 0.80  $ 0.36$^{a}$  — a. Assumed annual dividend for 2003 only applied to grants made after February 5, 2003. Earnings Per Share.  FCX’s basic net income per share of  common stock was calculated by dividing net income appli- cable to common stock by the weighted-average number of  common shares outstanding during the year. The following is  a reconciliation of net income and weighted-average common  shares outstanding for purposes of calculating diluted net  income per share (in thousands, except per share amounts): 2004  2003  2002 Net income before preferred dividends and cumulative effect of changes i n accounting principles  $202,267  $197,253  $167,703 Preferred dividends   (45,491)   (27,441)   (37,604) Net income before cumulative effect   156,776   169,812   130,099 Cumulative effect of changes in accounting principles  —   (15,593)  (3,049) Net income applicable to common stock  $156,776  $154,219  $127,050 Weighted average common shares outstanding   182,272   155,805   144,649 Add: Dilutive stock options (see Note 7)  2,197  3,094  1,498 Restricted stock (see Note 7)  454  203  271 Weighted average common shares outstanding for purposes of calculating  diluted   net income per share   184,923   159,102   146,418 Diluted net income per share of common stock: Before cumulative effect  $  0.85  $  1.07  $  0.89 Cumulative effect  —  (0.10)  (0.02) Net income per share of common stock  $  0.85  $  0.97  $  0.87 because including the conversion of these instruments would  have increased reported diluted net income per share. A  recap of the excluded amounts follows (in thousands, except  exercise prices): Outstanding stock options with exercise prices greater than  the average market price of FCX’s common stock during  the year are excluded from the computation of diluted net  income per share of common stock. In addition, certain  convertible instruments (see Notes 5 and 7) are excluded  60 |  FREEPORT-McMoRan COPPER & GOLD INC. a. FCX’s 7% Convertible Senior Notes were issued on February 11, 2003, and are convertibl e into 18.6 million shares of common stock (see Note 5). b. On March 30, 2004, FCX sold 1.1 million shares of 5  1 /2% Convertible Perpetual Prefer re d Stock for $1.1 billion, with net proceeds totaling $1.067 billion (see Note 7). c. 51.5 percent of FCX’s 8  1 /4% Convertible Senior Notes converted to FCX common stock  i n August 2003. In January 2004, approximately 37 percent converted to FCX common  stock and the remaining notes converted to FCX common stock in July 2004 (see Note  5 ). d. FCX’s Step-Up Convertible Preferred Stock was redeemed in December 2003 (see Note 7). 2004  2003  2002 Weighted average outstanding options  —  1,718  7,878 Weighted average exercise price  —  $  30.37  $  22.73 Interest on 7% Convertible Senior Notes, net of taxes$^{a}$  $ 41,430  $ 36,873  N/A Weighted average shares issuable upon conversion$^{a}$  18,625  16,463  N/A Dividends on 5  1 /2% Convertible Perpetual Preferred Stock$^{b}$  $ 45,491  N/A  N/A Weighted average shares issuable upon conversion$^{b}$  15,632  N/A  N/A Interest on 8  1 /4% Convertible Senior Notes, net of taxes$^{c}$  $  3,829  $ 39,902  $ 50,488 Weighted average shares issuable upon conversion$^{c}$  3,073  33,992  42,220 Dividends on Step-Up Convertible Preferred Stock$^{d}$  N/A  $ 20,532  $ 24,499 Weighted average shares issuable upon conversion$^{d}$  N/A  11,424  11,690