Calculate Tobin's q for a firm. You have the following information: MPK = 2 percent, R = 4 percent, the stock market value is $1,728, the capital stock is 12 units, and the price of stock is $120. Based on this information, Tobin's q is ________. Given your answer, the market believes the firm should ________.
A) 1.2; invest in more capital
B) 1.3; disinvest in capital
C) 0.83; disinvest in capital
D) 0.75; invest in more capital
E) 2.07; raise its depreciation rate

Question

Quizplus · Accepted Answer

Tobin's q is calculated as the ratio of the market value of a firm to the replacement cost of its capital. Given the stock market value is $1,728 and the capital stock is 12 units with a price of stock $120, the replacement cost of capital is 12 units * $120 = $1,440. Thus, Tobin's q = $1,728 / $1,440 = 1.2. A Tobin's q greater than 1 suggests that the market value of the firm is greater than the cost of its capital, indicating the firm should invest in more capital.

Calculate Tobin's Q for a Firm