A company earns an Earnings Per Share (EPS1) of ₹15. It maintains a constant dividend payout ratio of 40%. If its Return on Equity (RO

The sustainable growth rate is given by g = b × ROE, where b is the retention ratio, i.e. the proportion of earnings ploughed back into the business. b = 1 - payout ratio = 1 - 0.40 = 0.60 g = 0.60 × 15% = 9% The firm retains 60% of its earnings and each rupee retained earns 15%, so equity and earnings grow at 0.60 × 15% = 9% a year. As the payout ratio is constant, dividends also grow at 9%. The EPS of ₹15 is not required for finding g. It would be used to find the next dividend, D1 = 0.40 × 15 = ₹6. A common error is to multiply ROE by the payout ratio instead of the retention ratio, which gives 6% (option B). Hence the correct option is (C).