According to Tobin's q theory of investment,
A) when the stock market undervalues a company, the company should invest in capital expansion
B) when a firm's bond prices rise, the firm should sell off existing assets
C) borrowing funds by issuing bonds is always a less expensive way than issuing stock to raise funds for investment
D) a firm should buy capital when its stock market valuation exceeds the replacement cost of capital
E) firms should invest at a constant rate each month, a practice known as dollar-cost averaging

Question

Quizplus · Accepted Answer

According to Tobin's q theory of investment, a firm should buy capital when its stock market valuation exceeds the replacement cost of capital. This means that investing in new capital equipment becomes more profitable for the firm as its market value increases, and it can expect a good return on investment. A lower valuation indicates that the market does not expect the company's investment in new machinery to generate a significant return.

According to Tobin's Q Theory of Investment