When Tobin's q is ________, the market is signaling a firm should ________.

Question

Quizplus · Accepted Answer

Tobin's q measures the market value of a firm relative to its replacement cost. When Tobin's q is greater than one, it indicates that the market values the firm's assets more than the cost of replacing them, which suggests that the firm is undervalued and should invest in more capital. When Tobin's q is less than one, it suggests that the market values the firm's assets less than the cost of replacing them, which suggests that the firm is overvalued and should raise dividend payments. A Tobin's q equal to zero indicates that the market values the firm's assets at the same level as its replacement cost, which suggests that the firm is fairly valued. An infinite Tobin's q is not a realistic scenario, as it would imply that the market values the firm's assets at an infinitely high level, which is not possible.

When Tobin's Q Is ________, the Market Is Signaling a Firm