Answer: 15.

## Explanation Using the Gordon growth model, the justified forward P/E ratio can be calculated as: **Formula:** \[ \text{Justified P/E} = \frac{D_1/E_1}{r - g} = \frac{\text{Payout Ratio}}{r - g} \] Where: - \( D_1/E_1 \) = Dividend payout ratio = 45% = 0.45 - \( r \) = Required rate of return = 10% = 0.10 - \( g \) = Growth rate = 7% = 0.07 **Calculation:** \[ \text{Justified P/E} = \frac{0.45}{0.10 - 0.07} = \frac{0.45}{0.03} = 15 \] **Step-by-step reasoning:** 1. The Gordon growth model formula for price is: \( P_0 = \frac{D_1}{r - g} \) 2. For forward P/E, we use: \( \frac{P_0}{E_1} = \frac{D_1/E_1}{r - g} \) 3. \( D_1/E_1 \) is the dividend payout ratio = 45% 4. The denominator \( r - g \) = 10% - 7% = 3% 5. 45% ÷ 3% = 15 **Note:** The EPS forecast of $0.60 is not needed for this calculation since we're calculating a ratio (P/E), not the absolute price. **Answer verification:** - Option A: 15 ✓ (Correct) - Option B: 18 (Incorrect) - Option C: 20 (Incorrect) The justified forward P/E is exactly 15, making option A the correct choice.

Author: LeetQuiz .