Homework: HW #1 Save Score: 8.89 of 30 pts 3 of 7 (7 complete) HW Score: 78.89%, 78.89 of 100 pts P1-17 (similar to) Question Help Napper Corporation has an existing loan in the amount of $5 million with an annual interest rate of 5.2%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace Napper Corporation's existing loan agreement with a new one. Money Tree Bank has offered to loan Napper $5 million at a rate of 4.0% but requires Napper to provide financial statements that have been reviewed by a CPA firm. Earn More Bank has offered to loan Napper $5 million at a rate of 2.8% but requires Napper to provide financial statements that have been audited by a CPA firm. Napper Corporation's controller approached a CPA firm and was given an estimated cost of $27,000 to perform a review and $42,000 to perform an audit. Read the requirements. (Enter amounts in dollars, not millions, throughout.) Requirement a. Explain why the interest rate for the loan that requires a review report lower than that for the loan that does not require a review. Explain why the interest rate for the loan that requires an audit report is lower than the interest rate for the other two loans. information risk. A review report provides moderate assurance to financial statement users. Compared to a review report, an audit provides further assurance and thus The interest rate for the loan that requires a review report is lower than the loan that does not require a review because of the lower lower information risk. As a result, the interest rate is lowest for the loan with the audit report. Requirement b. Calculate Napper Corporation's annual costs under each loan agreement, including interest and costs for the CPA firm's services. Indicate whether Napper should keep its existing loan, accept the offer from Money Tree Bank, or accept the offer from Earn More Bank. Begin by calculating the annual costs under each loan agreement. (Complete all input fields. Enter a "0" for any zero balances.) Cost of CPA Annual Loan Lender Requirements Services Annual Interest Cost Existing loan (No CPA service) 0 Money Tree Bank (CPA Review service) a. Explain why the interest rate for the loan that requires a review report is lower Earn More Bank (CPA Audit service) than that for the loan that does not require a review. Explain why the interest rate for the loan that requires an audit report is lower than the interest rate for the other two loans. b. Calculate Napper Corporation's annual costs under each loan agreement, including interest and costs for the CPA firm's services. Indicate whether Napper should keep its existing loan, accept the offer from Money Tree Bank, or accept the offer from Earn More Bank, C. Assume that Money Tree Bank has offered the loan at a rate of 4.0% with a review, and the cost of the audit has increased to $117,000 due to new auditing standards requirements. Indicate whether Napper should keep its existing loan, accept the offer from Money Tree Bank, or accept the offer from Earn More Bank. d. Discuss why Napper may desire to have an audit, ignoring the potential reduction in interest costs. e. Explain how a strategic understanding of the client's business may increase the value of the audit service. Print Done Enter any number in the edit fields and then click Check Answer. ? parts remaining Clear All Check