The security was issued three years ago at 40security the, Financial Management

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The security was issued three years ago at 40security the

Question

You want to estimate the cost of a firm's hybrid security.

The security was issued three years ago at $40/security. The price is currently $42/security. It pays a semiannual dividend of $2.00/security.

The company has the one-time option to pay a super dividend of $45/security in 5 years, which would cause the securities to expire (essentially, a buyback option).

Your research indicates that the company will exercise this option with a probability of 60%. What is the annualized cost of this firm's hybrid security capital?

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