Drop-down options for part a.
Drop-down options for part c.
Adjusting for Off-Balance Sheet Liabilities Fitch's 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 8x 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, Kohl's reports the following amounts. Note: Kohi's had not yet adopted the new lease standard. $ millions Liabilities Total debt Equity Cash from operations Operating lease payments (annual) Feb. 2. 2019 Feb. 3, 2018 $7,081 $8,129 3,569 4,604 5,527 5,419 2.107 1,691 307 299 Required a. Why would Fitch make this sort of adjustment prior to calculating credit-risk ratios? b. Compute Liabilities to equity and Cash from operations to debt for both years using the numbers as reported by Kohi's. Note: Round your answers to two decimal places (for example, enter 7.65 for 7.645555). FY 2019 FY 2018 Liabilities to equity Cash from operations to debt c. Adjust Kohl's total liabilities and debt for the 8x 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 Cash from operations to debt Does the adjustment make a material difference for these ratios? Required a. Why would Fitch make this sort of adjustment prior to calculating credit-risk ratios? In order to assess liquidity ratios In order to capture the true economic risk of the company In order to fully capture the effects of finance leases In order to fully capture true assets on the balance sheet t for both years using the numbers as reported by Kohl's. nter 7.65 for 7.645555). Does the adjustment make a material difference for these ratios? Lease adjustment does not materially impact overall leverage assessment Lease adjustment may materially impact overall leverage assessment
