Answer: 7%

## Explanation Using the Gordon growth model formula for justified forward P/E: **Formula:** \[ \frac{P_0}{E_1} = \frac{1 - b}{r - g} \] Where: - \( \frac{P_0}{E_1} \) = Justified forward P/E = 10 - \( b \) = Retention rate = 40% = 0.40 - \( 1 - b \) = Payout ratio = 60% = 0.60 - \( g \) = Growth rate = 3% = 0.03 - \( r \) = Required rate of return (what we need to find) **Step-by-step calculation:** 1. Plug in the known values: \[ 10 = \frac{0.60}{r - 0.03} \] 2. Rearrange the equation: \[ r - 0.03 = \frac{0.60}{10} \] \[ r - 0.03 = 0.06 \] 3. Solve for \( r \): \[ r = 0.06 + 0.03 = 0.09 \] Wait, this gives \( r = 9% \), which corresponds to option C. However, let me double-check the logic. Actually, let me reconsider: The Gordon growth model formula for justified forward P/E is: \[ \frac{P_0}{E_1} = \frac{D_1/E_1}{r - g} = \frac{1 - b}{r - g} \] Given: - P/E = 10 - Retention rate (b) = 40% = 0.40 - Payout ratio (1-b) = 60% = 0.60 - g = 3% = 0.03 So: \[ 10 = \frac{0.60}{r - 0.03} \] \[ r - 0.03 = 0.06 \] \[ r = 0.09 = 9% \] This suggests the answer should be **C. 9%**. **Verification:** If r = 9% and g = 3%, then r - g = 6%. With a payout ratio of 60%, the justified P/E = 0.60/0.06 = 10, which matches the given information. Therefore, the correct answer is **C. 9%**.

Author: LeetQuiz .