According to Tobin's q theory, when equity prices are high the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________.
A) cheap; low
B) expensive; low
C) cheap; high
D) expensive; high

Question

Quizplus · Accepted Answer

Tobin's q theory states that when equity prices are high, the market price of existing capital is expensive relative to new capital, so expenditure on fixed investment is also expensive. Therefore, the answer is D.

According to Tobin's Q Theory, When Equity Prices Are High