Recommended Financing. Frost Corporation has shown growth in sales and earnings but has a liquidity problem. The rate of inflation is high. At year-end 20X8, the company requires $500,000 for the following reasons:
New machinery $200,000
Research and development 80,000
Paying overdue obligations 130,000
Paying accrued expenses 25,000
Desired increase in cash balance 65,000
$500,000
Partial financial statements for 20X8 are shown below.
Frost Corporation Balance Sheet December 31, 20X8
ASSETS
Current assets
Cash $10,000
Other current assets 320,000
Total current assets $330,000
Noncurrent assets 570,000
Total assets $900,000
LIABILITIES AND STOCKHOLDERS’ EQUITTY
Current liabilities $500,000
Long-term debt 100,000
Total liabilities $600,000
Stockholders’ equity
Common stock $250,000
Retained earnings 50,000
Total stockholders’ equity 300,000
Total liabilities and stockholders’
Equity $900,000
Frost Corporation Income Statement For the year Ended December 31, 20X8
Sales $1,300,000
Cost of sales 600,000
Gross margin $ 700,000
Operating expenses 500,000
Income before tax $ 200,000
Tax 86,000
Net income $ 114,000
The company expects that sales and earnings will increase by 25 percent and 20 percent, respectively.
What type of financing is recommended?