Six years ago, Heart U, Inc. issued $33 million of 8 percent, semi-annual, 21-year bonds. The issue can be called at a premium of 8 percent. Flotation costs of 4 percent of the face value are being amortized over the issues 21-year life. If the company issued new 15-year bonds today, the coupon rate would be 6.5 percent and the flotation costs would equal 3% of the face value. Heart Us marginal tax rate is 40 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term securities returning 0.5 percent annually.

Year 1 - 15 Year o -2,640,000.00 1,056,000.00 377,142.86 Year1 Year 2 Year 3 Year 4 3 Call Premium on Old Issue 4 Tax Savings on Call Premium 5 Tax Savings on Flotation Cost for Old Issue 6 Flotation Cost on New Issue 7 One Month Additional Interest Cost 8 Tax Savings on One Month Interest Cost 9 One Month Interest Earnings 10 Tax on One Month Interest Earnings 11 TOTAL AFTER TAX INVESTMENT 12 13 Tax Savings on New Issue Flotation Costs 14 Tax Savings Lost on Old Issue Flotation Costs 15 NET AMORTIZATION TAX EFFECT Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 16 Year 14 Year 15 17 Interest Expense Saved on Old Bond 18 Tax Savings Lost on Old Bond Interest Expense 19 Interest Expense on New Bond 20 Tax Savings on New Bond Interest Expense 21 NET ANNUAL INTEREST SAVINGS 23 NPV Year 1 - 15 Year o -2,640,000.00 1,056,000.00 377,142.86 Year1 Year 2 Year 3 Year 4 3 Call Premium on Old Issue 4 Tax Savings on Call Premium 5 Tax Savings on Flotation Cost for Old Issue 6 Flotation Cost on New Issue 7 One Month Additional Interest Cost 8 Tax Savings on One Month Interest Cost 9 One Month Interest Earnings 10 Tax on One Month Interest Earnings 11 TOTAL AFTER TAX INVESTMENT 12 13 Tax Savings on New Issue Flotation Costs 14 Tax Savings Lost on Old Issue Flotation Costs 15 NET AMORTIZATION TAX EFFECT Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 16 Year 14 Year 15 17 Interest Expense Saved on Old Bond 18 Tax Savings Lost on Old Bond Interest Expense 19 Interest Expense on New Bond 20 Tax Savings on New Bond Interest Expense 21 NET ANNUAL INTEREST SAVINGS 23 NPV