Equity Q

CFA Level III
#1

Schweser says the denominator here uses market value of assets less liabilities, while CFAI says it’s the value of assets at replacement cost less liabilities. Can anyone confirm the difference? Does it even matter? Sorry if this posted before…

#2

In Example 15 on P.168 of CFAI text V3, “Assets at MV or Replacement Cost” is indicated and is used to calculate both Tobin’s/Equity q.

#3

Market Value = Replacement cost. Why the doubt? What other price could you put on the assets if you had to replace them ?

#4

janakisri Wrote: ------------------------------------------------------- > Market Value = Replacement cost. > > Why the doubt? What other price could you put on > the assets if you had to replace them ? In this context, yes this is correct. But not always. This holds true for only those assets which are available in high quantities. For example, cars. You can easily replace a 2005 Corolla with a 2005 Corolla. For assets not available, an example would be chemical plant. You cannot replace a chemical plant easily. Market value of a 20 year old chemical plant will not be equal to building one from scratch (at the same location)

#5

Presumably market values includes such premiums as licensing fees or regulatory costs to build a polluting unit such as a chemical plant . It is whatever the market thinks is the value to replace it

#6

janakisri Wrote: ------------------------------------------------------- > Presumably market values includes such premiums as > licensing fees or regulatory costs to build a > polluting unit such as a chemical plant . It is > whatever the market thinks is the value to replace > it To construct a building in Dubai will not be equal to its market value if completed now since the values are so depressed at the moment.

#7

Thanks AMA, that clears it up. Schweser sux.