Question

Suppose a firm has 100 machines and 100 shares outstanding. The price per share is $2, and the purchase price of a machine is $1. So Tobin's q is equal to

Answer 1

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Question:

Answer:

Tobin’s Q= 2

Explanation:

Tobin's Q: The Tobin's Q ratio is a measure of firm assets in relation to its market value. The value between 0 to 1 indicate that the costs more to replace a firm's assets than the firm's worth and more than 1 indicates firm is overvalued.

Tobin’s Q= Total Market Value of Firm​/Total Asset Value of Firm

Total Market Value of Firm​ = 100 * 2 = $200

Total Asset Value of Firm = 100*1 = $100

Tobin’s Q= 200/100 = 2

Tobin’s Q= 2

Here firm is overvalued because Tobin's Q is 2 that is more than 1.

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