Answer: 10.0%

## Explanation The sustainable growth rate (g) is calculated using the formula: **g = ROE × (1 - Dividend payout ratio)** Where: - g = sustainable growth rate = 6% = 0.06 - Dividend payout ratio = 40% = 0.40 - ROE = Return on Equity (what we need to find) Rearranging the formula to solve for ROE: **ROE = g / (1 - Dividend payout ratio)** Plugging in the values: ROE = 0.06 / (1 - 0.40) ROE = 0.06 / 0.60 ROE = 0.10 = 10.0% **Step-by-step calculation:** 1. First, calculate the retention ratio: 1 - 0.40 = 0.60 (or 60%) 2. Then divide the sustainable growth rate by the retention ratio: 0.06 / 0.60 = 0.10 3. Convert to percentage: 0.10 × 100% = 10.0% **Verification:** If ROE = 10.0% and retention ratio = 60%, then sustainable growth rate = 10.0% × 60% = 6.0%, which matches the given information. **Why the other options are incorrect:** - **A. 3.6%**: This would be too low. If ROE were 3.6% with 60% retention, the sustainable growth rate would be 2.16% (3.6% × 0.60), not 6%. - **C. 15.0%**: This would be too high. If ROE were 15.0% with 60% retention, the sustainable growth rate would be 9.0% (15.0% × 0.60), not 6%. Therefore, the correct answer is **B. 10.0%**.

Author: LeetQuiz .