Question

What is Tobin’s q? And what will firms do if there were a sharp rise in Tobin’s q?

Answer 1

Tobin's Q is a method used to evaluate fair value of a stock in a market generally used to make decisions.

Tobin's Q is the ratio of physical asset's market value and their replacement value.

If ratio is less than 1 it means market value of assets is less than replacement cost which means it is undervalued .

If ratio is greater than 1 it means market value of assets is greater than their replacement value which implies firm is earning more than replacement value of firm.

Therefore, sharp rise tobin's Q means firms will earn more profits.