Answer: 12.

## Explanation To calculate the justified forward P/E using the Gordon Growth Model, we use the formula: **Justified Forward P/E = Payout Ratio / (r - g)** Where: - **Payout Ratio** = Average payout ratio over the period - **r** = Required rate of return = 11.5% - **g** = Sustainable growth rate ### Step 1: Calculate the average payout ratio Payout ratio = Dividends per Share / Earnings per Share - Year 1: 1.60 / 2.50 = 0.64 or 64% - Year 2: 1.71 / 2.44 = 0.7008 or 70.08% - Year 3: 1.80 / 3.60 = 0.50 or 50% - Year 4: 1.92 / 3.20 = 0.60 or 60% **Average Payout Ratio** = (64% + 70.08% + 50% + 60%) / 4 = 61.02% ### Step 2: Calculate the compounded annual earnings growth rate We need to calculate the growth rate from Year 1 to Year 4: Earnings per Share: - Year 1: $2.50 - Year 4: $3.20 - Number of years: 3 (from Year 1 to Year 4) **Growth Rate (g)** = (3.20 / 2.50)^(1/3) - 1 = (1.28)^(0.3333) - 1 = 1.0857 - 1 = 0.0857 or 8.57% ### Step 3: Calculate justified forward P/E Justified Forward P/E = Payout Ratio / (r - g) = 0.6102 / (0.115 - 0.0857) = 0.6102 / 0.0293 = 20.83 ### Step 4: Compare with options The calculated justified forward P/E is approximately 20.83, which is closest to 21 (Option C). However, let's double-check the calculation: - r - g = 0.115 - 0.0857 = 0.0293 - 0.6102 / 0.0293 = 20.83 This suggests the correct answer should be **C. 21**. **Note:** There might be slight rounding differences in the calculation, but 20.83 is clearly closest to 21 among the options (10, 12, 21).

Author: LeetQuiz .