Kazuo U to is analyzing the stock of Brother Industries, Ltd. (Tokyo Stock Exchange: 64480), a diversified Japanese company that produces a wide variety of products. Brother distributes its products under its own name and under original - equipment manufacturer agreements with other companies. U to has concluded that a multistage DDM is appropriate to value the stock of Brother Industries and the company will reach a mature stage in four years. The ROE of the company has declined from 16.7 percent in the fiscal year ending in 2004 to 12.7 percent in the fiscal year ending in 2008. The dividend payout ratio has increased from 11.5 percent in 2004 to 22.3 percent in 2008. Uto has estimated that in the mature phase Brother’s ROE will be 11 percent, which is approximately equal to estimated required return on equity. He has also estimated that the payout ratio in the mature phase will be 40 percent, which is significantly greater than its payout ratio in 2008 but less than the average payout of about 50 percent for Japanese companies.

A. Calculate the sustainable growth rate for Brother in the mature phase.
B. With reference to the formula for the sustainable growth rate, a colleague of U to asserts that the greater the earnings retention ratio, the greater the sustainable growth rate because g is a positive function of b. The colleague argues that Brother should decrease payout ratio. Explain the flaw in that argument.