Explanation:

The sustainable growth rate (g) formula is:

$g = ROE \times (1 - \text{Dividend payout ratio})$

Where:

• g = sustainable growth rate = 6% = 0.06
• Dividend payout ratio = 40% = 0.40
• Retention ratio = 1 - Dividend payout ratio = 1 - 0.40 = 0.60

Rearranging the formula to solve for ROE:

$ROE = \frac{g}{(1 - \text{Dividend payout ratio})} = \frac{0.06}{0.60} = 0.10 = 10\%$

Verification:

• ROE = 10%
• Retention ratio = 60%
• Sustainable growth rate = 10% × 60% = 6%

Therefore, the correct answer is B. 10.0%.