An Automobile Finance Company Analyzed a Sample of Recent Automobile

question 46

Multiple Choice

An automobile finance company analyzed a sample of recent automobile loans to try to determine key factors in identifying borrowers who would be likely to default on their auto loan. The response variable Default equals 1 if the borrower defaulted during the term of the loan and 0 otherwise. The predictor variable AutoDebt% was the ratio (expressed as a percent) of the required loan payments to the borrower's take-home income at the time of purchase. JobTime was the number of years the borrower had worked at their current job at the time of purchase. CredScore was the borrower's credit score at the time of purchase. Below is part of the classification tree the finance company derived from the data collected in the study. Assume they classify those with a default probability estimate of at least .5 as Defaulters. A potential borrower who has been at their current job for 1 year would like to apply for a loan with payments equaling 21% of their income. To be approved for the loan they would need to be classified as a non-Defaulter. Of the following credit scores, which is the lowest this potential borrower could have to be approved for the loan?

• A) 421
• B) 723
• C) 795
• D) There is no credit score which would allow them to be classified as a non-Defaulter.
• E) There is insufficient information to determine the minimum allowable credit score.

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Definitions:

Financial Statement(s)

Reports that summarize the financial performance and position of a business or entity.

Cost of Goods Sold

Direct expenses involved in the fabrication of goods a company markets, including costs for materials and labor.

Freight-In

The cost associated with transporting goods into a warehouse or business, typically included in the cost of goods sold (COGS).

Beginning Inventory

refers to the value of inventory on hand at the start of an accounting period.