Consider the following summary financial statements at the beginning of the period:

Current assets $1,050,000 Current liabilities $ 650,000 Other assets 2,450,000 Other liabilities 1,500,000 Capital stock 100,000 00,000,000 Retained earnings 1,250,000 Total $3,500,000 Total $3,500,000 Net income during the period (exclusive of the lease) was $250,000.Also consider the following lease terms:

• Annual payments, at year-end, $25,000

• Ten-year useful life

• Twelve percent borrowing rate

• Straight-line benefit pattern

• Zero residual value

• Lease purchase

• Eight-year lease term

• Lessor’s fair value of property, $225,000 Required Use beginning balance sheet data to calculate the following requirements:

a. Calculate the ROE ratio and the financial leverage ratio for this company,assuming that this new asset is reported on the financial statements as a capital lease.

b. Calculate the ROE ratio and the financial leverage ratio for this company,assuming that this new asset is reported on the financial statements as an operating lease.

c. Discuss the relative impact of acquiring this asset under an operating lease versus a capital lease on these financial statements. Demonstrate these effects using the accounting equation.