Company A has an existing loan of $12.5 million currently outstanding from Money Bank. Money Bank charges a 6% annual rate of interest on this borrowing. As Company A is a relatively small, private company, Money Bank has agreed to accept management prepared, unaudited financial statements from Company A every year, to keep the Bank apprised of the company’s financial position, results of operations, and cash flow. Company A has recently been approached by Trusted Bank. Trusted Bank has offered to refinance the existing loan at a 5% annual rate of interest if Company A provides audited financial statements in support of their loan application. Company A is evaluating this proposal, and has contacted a local CPA firm. The CPA firm has offered to be engaged to perform and audit, which they estimate will cost Company A about $35,000.
1. Should Company A pursue the offer by Trusted Bank why or why not?
2. Why is Trusted Bank willing to offer a lower interest rate on this loan than Money Bank?