Rockwater plans to acquire $30,000,000 in long- term assets. One financing option is to purchase the assets by making a $4,000,000 down payment, signing a ten-year note to borrow the remaining $26,000,000 with interest and a $2,000,000 principal payment due next year. A second option is to use a lease that is structured to qualify for off-balance sheet financing. The lease terms are to sign a ten- year lease with a present value of $30,000,000 with no down payment required and equal annual lease payments. Further, Rockwater has a bank loan with Bank that contains a covenant which states that its current ratio cannot be lower than 1.8 and its debt-to-equity ratio cannot be larger than 1.25.

1. Using a simplified balance sheet depicted in Table 1, calculate Rockwater's current ratio and debt-to equity ratio for the following:

(a) The period before the long-term assets are acquired: (b) If the long-term assets are leased; (c) If the long-term assets are purchased

2. Explain how each method (purchasing or leasing) to acquire the long-term assets affects Rockwater's loan covenant agreement with Bank.

Table 1 Simplified Balance Sheet Rockwater

Assets
Current Assets	$14,000,000
Long-Term Assets	76,000,000
Total Assets	$90,000,000
Liabilities
Current Liabilities	$ 7,000,000
Long-Term Liabilities	38,000,000
Total Liabilities	$45,000,000
Owners' Equity	$45,000,000
Total liabilities & Owners' Equity	$90,000,000