If Tobin's q is greater than 1, then managers should:
A) increase the capital stock of the firm.
B) maintain the existing capital stock of the firm.
C) allow inventories to run down.
D) decrease the capital stock of the firm.

Question

Quizplus · Accepted Answer

Tobin's q measures the market value of a firm's assets relative to their replacement cost. When Tobin's q is greater than 1, it suggests that the market value of the firm's assets is higher than their replacement cost. This implies that the firm could increase its value by investing in additional capital stock, which would generate additional profits and increase the market value of the firm. Therefore, managers should increase the capital stock of the firm to take advantage of this situation.

If Tobin's Q Is Greater Than 1, Then Managers Should