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?