Answer: 6.7%.

**Explanation:** The correct answer is **B (6.7%)**. The justified forward P/E ratio is calculated as: \[ \text{Justified P/E} = \frac{p}{r - g} \] where: - \( p \) = payout ratio = \( 1 - \text{retention rate} = 1 - 0.60 = 0.40 \) - \( r \) = required rate of return = nominal risk-free rate + risk premium = \( 0.025 + 0.06 = 0.085 \) - \( g \) = dividend growth rate Given the P/E ratio of 22: \[ 22 = \frac{0.40}{0.085 - g} \] Solving for \( g \): \[ 0.085 - g = \frac{0.40}{22} \] \[ 0.085 - g = 0.01818 \] \[ g = 0.085 - 0.01818 = 0.0668 \text{ or } 6.7\% \] **Why not A or C?** - **A (5.8%)** is incorrect because it mistakenly uses the retention rate instead of the payout ratio. - **C (7.4%)** is incorrect because it uses the current stock price instead of the P/E ratio to solve for \( g \).

Author: LeetQuiz Editorial Team