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	$6,803	$7,811
Total debt	3,429	4,424
Equity	5,527	5,419
Cash from operations	2,107	1,691
Operating lease payments (annual)	295	287

Required a. Why would Fitch make this sort of adjustment prior to calculating credit-risk ratios? Answer

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 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? Answer

Lease adjustment does not materially impact overall leverage assessment

Lease adjustment may materially impact overall leverage assessment