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?

A) 10.64%                                          B) 10.20%                                          C) 9.52%

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