Skip to content

Financial Education

Menu
  • Ethics
  • Financial Statement Analysis
Menu

Tobin’s q

Posted on January 30, 2021January 27, 2021 by financialeducation

Tobin’s q is a valuation measure closely related to Price-to-book (P/B) and residual income models. It expresses the ratio between the market value of the firm (debt and equity) and the replacement value of its assets.

q = (MV Debt + MV Equity)/(Replacement cost of assets)

Although Tobin’s q is a similar concept to Price/Book, there are important differences. First, the numerator includes both debt and equity and thus measures the total firm value rather than the value of equity. For consistency, the denominator includes total assets rather than merely net assets. A further difference is that the assets are measured at current, rather than historic value.

A higher value for Tobin’s q indicates that assets are being used more effectively. In practice, it is difficult to measure Tobin’s q due to limited availability of information concerning replacement value of assets.

Categories

  • CFA Program (70)
  • Equity (1)
  • Ethics (35)
  • Financial Statement Analysis (16)
  • Portfolio Management (2)
  • Quantitative Methods (17)

Meta

  • Log in
  • Entries feed
  • Comments feed
  • WordPress.org
©2022 Financial Education | Built using WordPress and Responsive Blogily theme by Superb