Question

Tobin's Q is:

a) the ratio of the market value of company assets to the replacement costs of the assets, as well as a means to find overvalued stocks: If Q is high it means that the cost to replace a firm's assets is greater than the value of its stock.

b) the ratio of the market value of company assets to the replacement costs of the assets.

c) the same as the price-to-book ratio.

d) a means to find overvalued stocks: If Q is high it means that the cost to replace a firm's assets is greater than the value of its stock.

Answer 1

Option B is correct.

the ratio of market value of company's assets to the replacement costs of the assets.

Explanation:

Tobin Q = Market Value of Company's Assets/Replacement Cost of Assets

If Tobon Q is between 0 and 1,

it means that the cost of replacing firm's asset is greater than the market value of the stock and the stock is undervalued

If Tobin Q is greater than 1,

it means that the cost of replacing firm's asset is smaller than the market value of the stock and the stock is overvalued

It is different than Price to Book Ratio as in P/B ratio we take Book value of the company's assets into consideration.