eggie White, a corporate treasurer, is trying to decide which two 1-year securit

ID: 2741327 • Letter: E

Question

eggie White, a corporate treasurer, is trying to decide which two 1-year securities to purchase: a negotiable CD with nominal yield of 6 percent or a municipal security with a nominal yield of 4.5 percent. The issuing municipality is not in the same state as Reggie s company, but he recognizes the muni s interest is exempt from federal taxation. His company s marginal federal tax rate is 39 percent. Which security should the treasurer select, assuming the securities have equal default risk?

Please show all calculation in an excel spreadsheet

Explanation / Answer

Calculate which security purchased:

Details

Municipal
tax @39%

After tax
yield

A negotiable CD with nominal yield 6%

6% *0.39 = 2.34%

6% - 2.34% = 3.66%

Municipal security with nominal yield of 4.5%

Exempted

4.50%

Choose the which security

Yes

Eggie white, choose the municipal security with nominal yield of 4.5% due to have higher yield.