g = (RR)(ROE)

RR = 1 ? dividend payout ratio = 1 ? 0.4 = 0.6

ROE = NI / Total Equity = 1,000,000 / 5,000,000 = 1 / 5 = 0.2
Note: This is the "simple" calculation of ROE. Since we are only given these inputs, these are what you should use. Also, if given beginning and ending equity balances, use the average in the denominator.

g = (0.6)(0.2) = 0.12 or 12%

Assuming past investments are stable and earnings are calculated to allow for maintenance of past earnings power, then the firm’s expected dividend growth rate (g) can be defined as the firm’s earnings plowback or retention rate (RR) times the return on the equity (ROE) portion of new investment. RR is equal to 1 minus the dividend payout ratio, and ROE equals profit margin times total asset turnover times financial leverage. This growth rate is also called the sustainable growth rate.