Effects of Financing Decisions Assume Masimo Corporation, a medical technology company, has total assets of $3,500,000 and total liabilities of $3,000,000. Masimo is considering two alternatives for acquiring additional ware-house space. Under the first alternative, the building would be purchased for $200,000 and financed by issuing long-term bonds. Under the second alternative, the building would be rented with an annual lease cost of $20,000 per year.

Round answers to one decimal place, if applicable.

a. Compute the company's current debt-to-equity ratio.

b. Just after the agreements are signed, what effect would the addition of warehouse space have on its debt-to-equity ratio? Compute the debt-to-equity ratio under the following assumptions.

1. Assuming the building is purchased by issuing bonds?

2. Assuming the building is rented on an annual lease basis?