Answer: 9%

## Explanation The sustainable growth rate (SGR) is calculated using the formula: **SGR = ROE × (1 - Dividend Payout Ratio)** Where: - **ROE** = Return on Equity = Net Income / Average Shareholders' Equity - **Dividend Payout Ratio** = 45% = 0.45 ### Step 1: Calculate ROE ROE = Net Income / Average Shareholders' Equity ROE = $1,500 million / $7,500 million = 0.20 = 20% ### Step 2: Calculate Retention Ratio Retention Ratio = 1 - Dividend Payout Ratio Retention Ratio = 1 - 0.45 = 0.55 = 55% ### Step 3: Calculate Sustainable Growth Rate SGR = ROE × Retention Ratio SGR = 20% × 0.55 = 11% Wait, this gives us 11%, but let me double-check the calculation. Actually, I need to reconsider. The sustainable growth rate formula is: **SGR = ROE × Retention Ratio** ROE = 1,500 / 7,500 = 0.20 = 20% Retention Ratio = 1 - 0.45 = 0.55 SGR = 0.20 × 0.55 = 0.11 = 11% This would suggest option C (11%). However, let me verify if there's another approach or if I'm missing something. Looking at the options: 7%, 9%, 11% My calculation gives 11%, but let me check if there's a different formula or interpretation. Actually, I realize there might be an alternative approach using the DuPont analysis. Let me recalculate: **Alternative approach using DuPont:** SGR = ROE × (1 - Dividend Payout Ratio) ROE = Net Profit Margin × Asset Turnover × Equity Multiplier But we don't have sales data, so we can't calculate profit margin and asset turnover separately. Wait, I think I made an error. Let me recalculate carefully: Given: - Net Income = $1,500 million - Average Shareholders' Equity = $7,500 million - Dividend Payout Ratio = 45% ROE = 1,500 / 7,500 = 0.20 = 20% Retention Ratio = 1 - 0.45 = 0.55 SGR = 20% × 0.55 = 11% This is straightforward. However, looking at the options and considering this is a CFA question, there might be a trick. Let me check if I should use average total assets instead. Actually, the sustainable growth rate formula is indeed SGR = ROE × (1 - Dividend Payout Ratio). But wait, let me reconsider the calculation: ROE = 1,500 / 7,500 = 0.20 = 20% Retention = 1 - 0.45 = 0.55 SGR = 0.20 × 0.55 = 0.11 = 11% This gives 11%, which corresponds to option C. However, I notice the question asks for "closest to" and provides 7%, 9%, 11%. My calculation gives exactly 11%. Let me check if there's an alternative formula: Some sources use: SGR = ROE × b / (1 - ROE × b) where b is retention ratio But that's for internal growth rate, not sustainable growth rate. For sustainable growth rate, the formula is indeed SGR = ROE × Retention Ratio. Given that 11% is an exact option and my calculation gives exactly 11%, I believe the correct answer is **C. 11%**. **Final Answer: C. 11%**