B is correct.
Justified forward P/E: P₀ /E₁ = p / (r – g)
p = payout ratio = 40% (given);
r = required rate of return = 12% (given)
g = (1 – Dividend payout ratio) × ROE = (1- 0.40) × 15 = 9%
P₀ /E₁ = p / (r – g) = 0.40 / (0.12 – 0.09) ≈ 13.3
Alternatively:
Justified forward P/E: P₀ /E₁ = (D1 / E1 ) / (r – g)
g = (1 – Dividend payout ratio) × ROE = (1- 0.40) × 15 = 9%
D₁ = $1.47 x 1.09 = 1.60; E1 = $4.00 (given); r = required rate of return = 12% (given)
P₀ /E₁ = (D₁ / E₁ ) / (r – g) = (1.60 / 4.00) / (0.12 – 0.09) ≈ 13.3.