Adjusting for Off-Balance Sheet Liabilities Fitchs current analytical approach views operating leases as a debt-like form of funding and their analysts adjust core leverage and coverage ratios using a multiple to create a debt-equivalent for all companies that have not yet adopted the new lease standard. Fitch believes a standard 8 multiple is appropriate for assets with a long economic life, such as property leases. Specifically, Fitch multiplies the annual operating lease payments by 8 and adds that amount to debt prior to calculating ratios. In its 2018 annual report, Kohls reports the following amounts. Note: Kohls had not yet adopted the new lease standard.

$ millions	Feb. 2, 2019	Feb. 3, 2018
Liabilities	$6,942	$7,970
Total debt	3,499	4,514
Equity	5,527	5,419
Cash from operations	2,107	1,691
Operating lease payments (annual)	301	293

Required a. Why would Fitch make this sort of adjustment prior to calculating credit-risk ratios? AnswerIn order to assess liquidity ratiosIn order to capture the true economic risk of the companyIn order to fully capture the effects of finance leasesIn order to fully capture true assets on the balance sheet b. Compute Liabilities to equity and Cash from operations to debt for both years using the numbers as reported by Kohls. Note: Round your answers to two decimal places (for example, enter 7.65 for 7.645555).

	FY 2019	FY 2018
Liabilities to equity	Answer	Answer
Cash from operations to debt	Answer	Answer

c. Adjust Kohls total liabilities and debt for the 8 multiple and recalculate both ratios. Note: Round your answers to two decimal places (for example, enter 7.65 for 7.645555).

	FY 2019	FY 2018
Liabilities to equity	Answer	Answer
Cash from operations to debt	Answer	Answer

Does the adjustment make a material difference for these ratios? AnswerLease adjustment does not materially impact overall leverage assessmentLease adjustment may materially impact overall leverage assessment