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Q5. Discounted cash flow: pricing of a hybrid security The following graph shows cash flows of a hybrid security: 4 Time 0 Year 1 Year
Q5. Discounted cash flow: pricing of a hybrid security The following graph shows cash flows of a hybrid security: 4 Time 0 Year 1 Year 2 Year 4 Year 6 Timeline The first cash flow occurs today and is equal to $1 (Co = $1). The second cash flow occurs one year from today and is equal to $1.1 (C1 = $1.1). The third cash flow occurs two years from today and is equal to $1.21 (C2 = $1.21). Beyond year 2, cash flows come every two years forever. The long term growth rate is equal to 10% annually (gannual=10%) which corresponds to a two year growth rate of 21% (gtwo-year-21%). The annual discount rate (EAR) is 15%. What is the fair value of this security today? Make sure to explain all the steps you take and equations you use to get to the final
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