Shanti asked 7 years ago
Hi KC Lau,
I have been following you for past 1 year. I am subscribed to your emails. You have been doing great. I have learn a lot from your emails.
Here I am with a dillemma :). My company has offered me ESOS 9000 units for RM3.38 per unit. I am working with Gamuda. It was offered to me 1 year ago when the price was low. Now the price is aorunf RM4(+/-). I only have another 2 months plus to exercise. By April if I don’t exercise it will lapse. Exercise means I have either buy using my own money and hold it (as long as I wish) or buy and sell to current price without using my money, the company will use their own money and give the profit to me (which I need to do before april).
I am in a deep dillemma now whether to buy and keep it until the price go really up which may take couple of years or buy and sell it before april and take whatever profit. If i were to buy the stocks using my own money, I need RM3.38 x 9000 units = RM30,420.00 which I dont have currently, but I can take loan from company or use my credit cards( standard charetered offered me 2.3% interest for 10k cash withdrawal) or I can ask my dad or husband to invest. One more point my company issue divident 6% 2 times in a year so total 12% per annum which really a good ROI for my knowledge. My company never failed paying the dividend.
We have some huge projects coming up soon which I anticipate will boost our share price. I need your advice, should I buy the share using my own money and keep it or just buy and sell and just take profit.
P/S : If in future i planned to buy the stock, I may not get RM3.38 any more unless something really bad happened to the company and economy.
KCLau Staff answered 7 years ago
Hi Shanti, you are in a dilemma, but the decision comes back to just one thing: What is your internal rate of return?
In layman term, what return can you generate with the money? Let’s assume you can comfortably generate a 6% return somewhere (say paying off a debt, or investing in a 6% dividend stock, or ASB etc.)
Opt 1: Sell the option and get paid the money. Then you invest on your own for the 6% return.
Opt 2: Consider to exercise the option, only if you are confident that Gamuda stock will give higher than 6% return. If not, why do you exercise since you need to take up more debt and pay interest cost. It has to be at least earning 9% to make the interest cost worth while.
To decide, you need to know:
1. your own opportunity cost — how much return can you generate with this money?
2. how much return Gamuda stock will generate in the future?
These I can’t answer for you, as you know it better than I do.
If you don’t know the answer now and need to make a decision, yet don’t want to use leverage (borrow money), consider option 3
Option 3: Sell the option so you get the cash payment. Then use the proceed to buy back Gamuda share.