WCU Interest Rates and Stock Valuation Paper

A) Four years ago, Bling Diamond, Inc., paid a dividend of $1.65 per share. The company paid a dividend of $2.10 per share yesterday. Dividends will grow over the next five years at the same rate they grew over the last four years. Thereafter, dividends will grow at 5% per year.

• What will the company’s dividend be in seven years?
• Based on the dividend growth model, what are the two components of the total return on a share of stock? Which do you think is typically larger?
• B) The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, it is a “golden opportunity.” The mine will cost $3,400,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $575,000 at the end of the first year, and the cash inflows are projected to grow at 8% per year for the next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $450,000 at the end of Year 11.

• • What is the IRR for the gold mine?
  • The Utah Mining Corporation requires a return of 13% on such projects. Should the mine be opened?