Given EPS = ₹10, Dividend per Share (DP

Payout ratio = DPS/EPS = 3/10 = 30% Retention ratio b = 1 - 0.30 = 70% g = b × ROE = 0.70 × 18% = 12.6% Since no new equity is issued, growth has to be financed from retained earnings (plus any borrowing needed to keep the capital structure constant). 12.6% is therefore the rate at which earnings can grow without issuing new equity. Strictly speaking, b × ROE is the sustainable growth rate. The internal growth rate in corporate finance is a stricter measure: it uses ROA and assumes no external financing at all. The phrase “internal growth rate” in the question should be read as the growth from retained earnings with no equity dilution. Option (A), 5.4%, equals 0.30 × 18% and results from using the payout ratio instead of the retention ratio. Hence the correct option is (C).