An Automobile Finance Company Analyzed a Sample of Recent Automobile

question 27

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 with a credit score of 812 and a monthly income of $4,000 would like to apply for a loan. To be approved for the loan they would need to be classified as a non-Defaulter. Of the following monthly payments, which is the highest this loan could have to be approved for this potential borrower?

• A) $481
• B) $634
• C) $995
• D) None of these monthly payments would allow them to be classified as a non-Defaulter.
• E) There is insufficient information to determine the maximum allowable monthly payment.

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Definitions:

Weighted Average Method

A costing method that calculates the cost of inventory based on the weighted average of the cost of items available for sale, used in accounting.

FIFO Method

"First In, First Out," an inventory valuation method where the oldest inventory items are sold first.

Abnormal Spoilage

Wastage that occurs outside of the normal production process, often due to unusual or unforeseen circumstances.

Loss

A financial situation where expenses exceed revenues, leading to a negative outcome for the business.