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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
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
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?
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