Question

Vial-tek has a current loan in the amount of $3.5 million with an annual interest rate of 9.5%. The company delivers an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have obtainable to replace Vial-tek's existing loan agreement with a new one. First National Bank has obtainable to loan Vial-tek $3.5 million at a rate of 8.5% however requires Vial-tek to deliver financial statements that have been reviewed by a CPA firm. City First Bank has obtainable to loan Vial-tek $3.5 million at a rate of 7.5% however requires Vial-tek to provide financial statements that have been audited by a CPA firm. The controller of Vial-tek loomed a CPA firm as well as was given an estimated cost of $20,000 to perform a review as well as $45,000 to perform an audit.

a) Describe why the interest rate for the loan that needs a review report is lower than that for the loan that did not require a review. Describe why the interest rate for the loan that needs an audit report is lower than the interest rate for the other two loans.

b) Compute Vial-tek's annual costs under each loan agreement including interest as well as costs for the CPA firm's services. Indicate whether Vial-tek should keep its existing loan accept the offer from First National Bank, or else accept the offer from City First Bank.

c) Accept that First National Bank has offered the loan at a rate of 8.0% with a review as well as the cost of the audit has increased to $50,000 due to new auditing standards requirements. Indicate whether Vial-tek must keep its existing loan, accept the offer from First National Bank or accept the offer from City First Bank.

d) Deliberate why Vial-tek may desire to have an audit, ignoring the possible reduction in interest costs

e) Describe how a strategic understanding of the client's business may rise the value of the audit service