Any easy way to remember Tobin and Equity Q ?

CFA Level III
#1

Any easy way to remember Tobin and Equity Q ? totally can’t get my head around them or memorize the formulas Is it me or good chunk of this exam is knowing the formulas and plugging numbers in!!! how is that applicable to real world, that is what spreadsheet model are for…

#2

Use Accounting Equation: Assets = Equity + Liabilities

“Equity” is for Equity

“Tobin” is for Assets

Both use Market value / Replacement cost

#3

Tobin = Company market / replacement assets

Equity Q = (Equity / Replacement assets - MKT value Liabs)

Remember…they are pretty much saying a company should be worth the replacment asset cost. Hence we need a ratio. Mkt value on top/Replacment on bottom.

#4

Yep. Kevin explained very well. Tobin is related to Market value of entire company. MValue of Eq + MValue of debt thus is divided with Total Asset replacement cost. Equity Q R is related to MValue of Equity only thus divided with NAV replacement which is synonymous for Equity. Both models are mean reverting what means they attend to revert to historical mean ratio of 1.

#5

The key difference for me is where the debt lands in the equation.

In Tobin’s Q, the debt is on top (in the numerator). I remember this is because Tobin starts with “To”, like Top.

In Equity Q, the debt is on bottom (in the denominator)

#6

Thanks everyone

#7

Do we subtract MKT value of Liability OR replacement value of liability in the denominator when calculate equity q

#8

DEAL

thats how i remember it

Tobins Q spells DE on top A at the bottom (DEA)

equity Q spells E on top and AL at the bottom (EAL)

#9

Both denominators use replacement cost. Equity denominator is Replacement Value Net Worth (Net Assets) or (A-L), however they want to throw it at you.

#10

If there are BV of liability and market value of liability, choose market value of liability because net replacement cost is a market category. Usually is shown only Liability amount not both, BV and market liability amount. Thus is supposed that Liability category is already expressed as market value and can be deducted from MV of replacement cost of total assets used in Tobin Q Ratio.

I think we will not be hacksawed with FRA category questions as on L1 and L2.

#11

Replacement of Asset - Market value liabs.