Tobin's q may be interpreted as a measure of
A) the quantity of a firm's output
B) the optimal quantity of output for a monopolist
C) the relative importance of bond financing to equity financing
D) the rate of return on capital divided by the cost of capital
E) the useful life of physical capital

Question

Quizplus · Accepted Answer

Tobin's q is calculated as the market value of a firm divided by the replacement cost of its physical capital. It can be interpreted as the ratio of the firm's value to the cost of replacing its assets. This is a measure of investment efficiency, and a high Tobin's q suggests that the firm's investments are generating a high rate of return relative to their cost. Thus, it can be seen as a measure of the rate of return on capital divided by the cost of capital.

Tobin's Q May Be Interpreted as a Measure of