1 The Valuation of Stocks The oil company BP just reported earnings of $2 million. Assume that the company is all-equity financed. Due to the Deepwater Horizon explosion, it has been prevented from paying dividends. The average annual rate of return on BP's investments has been 16% and will remain at 16% for the future for all new, investments (including those made by reinvesting earnings) nalysts are expecting that it will take five years before the U.S. government will allow BP to pay dividends again. From year five onwards, the company will be able to pay 50% of its annual earnings as dividends to the shareholders. Assume that the riskless interest rate is 6%, that the expected rate of return on the market portfolio is 14%, and that BP's equity beta is 1.1. What is the current value of BP's equity