f. If Progressive were to repurchase all of its bonds on January 1, 2014, how wo
ID: 2777730 • Letter: F
Question
f. If Progressive were to repurchase all of its bonds on January 1, 2014, how would the income statement be affected?
g. How much doe sthe company owe under the line of credit with PNC Bank at year end? Why does Progressive discuss this in its debt footnote?
h. What does the footnote reveal about timing of debt due in 2014 and thereafter?
2013 2012 Carrying Value Fair Value Fair Value in millions Value 7% Notes due 2013 (issued: $150.0, October 3.75% Senior Notes due 2021 (issued: 6 58% Senior Notes due 2029 (issued 6.25% Senior Notes due 2032 (issued: 6.70% Fixed-to-Floating Rate Junior 1993) $500.0, August 2011) $300.0, March 1999) $400.0, November 2002) $0.0 497.6 295.3 $0.0 $149.9 497.3 295.2 394.5 $157.1 509.1 549.1 359.6 385.0 394.6 473.7 513.5 Subordinated Debentures due 2067 (issued: $1,000.0, June 2007; outstanding $677.1 and $731.2) 673.4 731.3 726.2 789.7 $1,860.9 $2,073.7 $2,063.1 $2,394.4 In March 2013, we entered into an unsecured, discretionary line of credit (the "Line of Credit") with PNC Bank, National Association ("PNC") in the maximum principal amount of $100 million. Subject to the terms and conditions of the Line of Credit documents, advances under the Line of Credit (if any) will bear interest at a variable rate equal to the higher of PNC's Prime Rate and the sum of the Federal Funds Open Rate plus 50 basis points. Each advance must be repaid on the 30h date after the advance or, if earlfer, on March 25, 2014, the expiration date of the Line of Credit. Prepayments are permitted without penalty. All advances under the Line of Credit are subject to PNC's discretion. We had no borrowings under the Line of Credit in 2013. Aggregate principal payments on debt outstanding at December 31, 2013, is as follows: (millions) Year 2014 2015 2016 2017 2018 Thereafter Payments 0.0 0.0 0.0 0.0 0.0 1,877.1 1,877.1 TotalExplanation / Answer
Answer:
F. Because the market value of progressive's notes is more than its book value. Progressive will have to report this difference as a loss on the income statement when it repurchases the bonds.
g.Progressive does not owe anything under the line of credit at year end.The $ 125million line of credit ensures that the company has easy access to significant amount of cash if the need arises. This reduces liquidity risk to investors and creditors which could reduce progressive's cost of capital.
h. Debt outstanding after 2014 and thereafter is 1877.1
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