Questions 6 through 8 are related 6. 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 $42,000 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 $575 beginning when the lease is signed. So at the signing, the customer must pay $4,575. 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. It assumes the vehicle will be sold immediately, which might not be realistic but is the easiest assumption. Assume monthly compounding for all calculations. a. $14,720 b. $16,745 c. $18,720 d. $21,071 e. $23,280 7. 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 6, this firm would: a. b. C. d. be able to earn 8% with a lower residual value than the firm in question 6. be able to earn 8% only with a higher residual value than the firm in question 6. be able to earn 8% with the same residual value as the firm in question 6 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 none of the above answers is correct. e. 8. Referring to question 7, an auto manufacturer whose vehicles have the same price as the firm in question 7 but higher residual values, perhaps due to perceptions about quality differences, would: a. b. C. d. e. be able to earn a 9% return with a higher monthly lease payment as other firms be able to earn a 9% return with the same monthly lease payment as other firms be able to earn a 9% return with a lower monthly lease payment as other firms. all of the above answers are correct because they are not mutually exclusive. none of the above answers is correct