Explanation

In the Gordon growth model, the justified forward P/E ratio is given by:

$\frac{P_0}{E_1} = \frac{D_1/E_1}{r - g} = \frac{b}{r - g}$

Where:

• $P_0$ = current price
• $E_1$ = expected earnings next year
• $D_1$ = expected dividend next year
• $r$ = required rate of return
• $g$ = sustainable growth rate
• $b$ = payout ratio ($D_1/E_1$)

From this formula:

1. Payout ratio (b): The justified P/E is positively related to the payout ratio. As the payout ratio increases, the P/E ratio increases, all else equal.

2. Dividend growth rate (g): The justified P/E is positively related to the growth rate, but this is not "always" true because if $g$ approaches $r$, the denominator approaches zero and the P/E becomes very large or undefined. Also, there are constraints on $g$ (it must be less than $r$).

3. Required rate of return (r): The justified P/E is negatively related to the required rate of return. As $r$ increases, the denominator increases, reducing the P/E ratio.

The question asks for what the justified forward P/E is "always positively related to." While both payout ratio and growth rate have positive relationships, the growth rate relationship has limitations (must be less than r, and extreme values cause issues). The payout ratio relationship is more straightforward and always positive within the model's assumptions.

Therefore, the correct answer is A. payout ratio.