Creative Analysis, Inc. can maintain a rate of growth of approximately 4.6% if they decide to maintain a constant debt-equity ratio.
In order to determine the rate of growth that Creative Analysis, Inc. can maintain, we need to first calculate the debt-equity ratio. The debt-equity ratio is calculated by dividing the total debt by the total equity. In this case, the total debt is the sum of long-term debt and accounts payable, which is $2,075 + $425 = $2,500.
The total equity is the sum of common stock and retained earnings, which is $3,000 + $1,700 = $4,700. Therefore, the debt-equity ratio is $2,500 / $4,700 ≈ 0.532.
Next, we can calculate the rate of growth using the formula:
Rate of Growth = Return on Equity x Retention Ratio
The return on equity is calculated by dividing the net income by the equity, which is $540 / $4,700 ≈ 0.115. The retention ratio is calculated by subtracting the dividends from the net income and dividing it by the net income, which is ($540 - $324) / $540 ≈ 0.4. Therefore, the rate of growth is 0.115 x 0.4 ≈ 0.046 or 4.6%.
--The given question is incomplete, the complete question is
"Creative Analysis, Inc. 2006 Income Statement Net sales Cost of goods sold Depreciation Earnings before interest and taxes Interest paid Taxable Income Taxes Net income $8,500 7,210 400 890 40 $ 850 310 $ 540 Dividends $324 Addition to retained earnings $216 Creative Analysis, Inc. 2006 Balance Sheet Cash Accounts rec. Inventory Total Net fixed assets Total assets 2006 $1,600 975 2,425 $5,000 2.200 $7.200 Accounts payable Long-term debt Common stock Retained earnings 2006 $2,075 425 3,000 1,700 Total liabilities & equity $7.200 If Creative Analysis, Inc. decides to maintain a constant debt-equity ratio, what rate of growth can they maintain?"--