The correct answer is C because the justified forward P/E ratio is calculated as:

$\text{Justified P/E} = \frac{p}{r - g}$

where:

• $p$ is the dividend payout ratio (40%).
• $r$ is the required rate of return (15%).
• $g$ is the sustainable growth rate, calculated as $g = b \times \text{ROE}$, where $b$ is the retention ratio (1 - dividend payout ratio = 60%) and ROE is 20%.

Thus, $g = 0.60 \times 20\% = 12\%$.

Substituting the values:

$\text{Justified P/E} = \frac{0.40}{0.15 - 0.12} = 13.3$

The closest option is C (13).

Why not A or B?

• A incorrectly uses the dividend payout ratio instead of the retention ratio to calculate $g$, leading to an incorrect P/E of 5.7.
• B incorrectly uses the difference between ROE and the required rate of return in the denominator, resulting in a P/E of 8.0.