Answer: 13

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.

Author: LeetQuiz Editorial Team