DO QUESTION 17!!!!

Questions 15 through 17 are related.

15. Assume you work for a company that leases automobiles. An auto dealership with a customer arranges for your employer to purchase the vehicle and then lease it to the customer. An important variable for the leasing firm is the residual value of the vehicle when the lease matures and the leasing firm sells the vehicle. It must be forecast and as a result is the source of much of the risk in the lease. A customer with sufficient credit wants to lease a $48,000 vehicle for 4 years with monthly payments. Other leasing companies offer leases for the vehicle requiring the customer to have a down payment of $4,000 and monthly lease payments of $620 beginning when the lease is signed. So, at the signing, the customer must pay $4,620. The dealership has a good relationship with your firm and wants it to provide the lease but it must be competitive. If your firm meets the competitors terms, what must the residual value be at the end of the lease in 4 years for your firm to earn 9% on the lease? Assume the customer will not exceed the mileage restriction and there is no damage to the vehicle. Note that the residual value is as of the date the vehicle is returned to the leasing firm, which is one month after the final payment. Assume monthly compounding for all calculations and round to the last dollar. Residual Value Required:

16. Referring to question 14, an auto manufacturer whose vehicles have the same price as the firm in question 14 but lower residual values, perhaps due to perceptions about quality differences, would: a. be able to earn a 9% return with a higher monthly lease payment as other firms. b. be able to earn a 9% return with the same monthly lease payment as other firms. c. be able to earn a 9% return with a lower monthly lease payment as other firms. d. all of the above answers are correct because they are not mutually exclusive. e. none of the above answers is correct.

17. A different leasing firm with a lower cost of capital needs to earn 8% on the leases it finances. If this new firm charges the same monthly leasing fee, then compared to the firm in problem 14, this firm would: a. be able to earn 8% with a lower residual value than the firm in question 14. b. be able to earn 8% only with a higher residual value than the firm in question 14. c. be able to earn 8% with the same residual value as the firm in question 14. d. all of the above answers are correct because it is more important to try to answer the question than it is to answer it correctly. e. none of the above answers is correct.