Reynolds Construction (RC) needs a piece of equipment that costs $200. RC can either lease the equipment or borrow $200 from a local bank and buy the equipment. Reynolds's balance sheet prior to the...

Reynolds Construction (RC) needs a piece of equipment that costs $200. RC can either lease the equipment or borrow $200 from a local bank and buy the equipment. Reynolds's balance sheet prior to the acquisition of the equipment is as follows:

Current assets:    $300                           Debt:  $400

Net Fixed Assets: 500                           Equity:  400

Total assets:          800                          Total claims:  800

a. (1) What is RC's current debt ratio?

    (2) What would be the company's debt ratio if it purchased the equipment?

    (3) What would be the debt ratio if the equipment were leased and the lease was not capitalized?

    (4) What would be the debt ratio if the equipment were leased and the lease were capitlaized? Assume that the present value of the lease payments is equal to the cost of the equipment.

b. Would the company's financial risk be different under the leasing and purchasing alternatives?