If firms are earning a profit, then this raises the value of installed capital and implies a value of Tobin's
Q)
A)market; low
B)market; high
C)replacement; low
D)replacement; high

Question

Quizplus · Accepted Answer

Tobin's Q is the ratio of the market value of installed capital to the replacement value of that capital. When firms are earning a profit, investors are more optimistic about the future performance of the company, which will increase demand for the company's shares and will result in a higher market value of the firm's installed capital. This, in turn, will increase the ratio of the market value of installed capital to the replacement value of that capital, which is Tobin's Q. Therefore, the value of Tobin's Q will be high.

If Firms Are Earning a Profit, Then This Raises the Value