JDV--Help--Tobin Ratio

Hi, JDV, someone says you may be the right person for my quesions. Would you please look into it? When analyzing Walgreen, an analyst defines “like companies” as companies that have the same value as Warlgreen for the following ratio (Tobin Ratio): Market value of invested capital/ replacement cost of invested capital Question: Is the analyst correct about the defination of the"like companies"? If not, please give the reasons. Thanks

You have to send out the special Bat Signal if you want JDV to show up.

I think that there are many different valuation ratios that would correctly justify “like companies” such as the one in the example above. I’m not JDV, but this seems fine to me.

Oh yes, a special Bat signal would certainly help. You can buy one at any old Duane Reade. Rather than a bat, its the CFA logo. It’s pricey however.

kate your ratio says that companies with same ratio would be valued the same by the market the ratio is basically market value(=market cap)/ real value(=replacement cost) Tobin’s Q Ratio Tobin’s Q Ratio, is the market value of a company’s assets divided by their replacement value. Replacement value being the current cost of replacing the firms assets. This ratio is named after Nobel Economics Laureate James Tobin of Yale University. He hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. In other words, the ratio of all the combined stock market valuations to the combined replacement costs should be around one. The formula is the following: market cap. / average total assets http://www.advfn.com/Help/tobin-s-q-ratio-202.html

If the Q ratio is significantly less than 1, then it would be cheaper for potential competitors to buy the firm rather than start a new business, so this would tend to increase its market price. If it sold for significantly more than the Q ratio of 1, then competitors would enter the market, and drive down the price of the firm until it was approximately equal to 1. Because the replacement cost of a company would be difficult to ascertain quickly, the Q ratio cannot be a driving force in determining daily stock prices for companies. However, it could be an indicator for long-term trends and as a potential takeover target if the company’s Q ratio is less than 1. If individuals or companies want to enter a business, certainly it would be an important consideration whether they could buy a business for less than what it would take to replicate the company by starting from scratch, especially since an established company would already have customers.

florinpop, Thank you soooooooooo much ! ~~~~ So you mean, the defination for the “like companies” is correct?

i would say yes because having same tobin ratio would mean that they have same relative value- that is market value and same intrinsic value-replacement value or actual value but I haven’t seen this I am just speculating. if this is your biggest problem then i think you are in a very good shape for the exam

got it. thanks a lot

kate I just ran into Tobin’s ratio tobin ratio is basically P/B ratio so from this point of view, the companies would be the ‘same’

So I had a nice weekend with my kids… Nice discussion about Tobin’s Q up there, but the original question asks whether that’s a good definition of “like companies”. I would say no, although two companies with very dissimilar Q-ratios would be different. There is just no reason to think that Walgreen couldn’t have a similar Q-ratio to Noble Drilling or AMD or some other very different thing. The idea of a Q-ratio was much more macro than to use it to find similar companies. BTW - The Q-ratio was a really popular thing to talk about during dot com because it suggested that we needed a good market crash. Which happened.

JDV, Thank you very much for the clarification. BTW,how to define “like companies”? Thanks.

i think this Q’s point is different size firms may have same ratio.

kateonair Wrote: ------------------------------------------------------- > JDV, > > Thank you very much for the clarification. > > BTW,how to define “like companies”? > > Thanks. It’s a huge question and the answer depends on what you are doing with the comparison.

JoeyDVivre Wrote: ------------------------------------------------------- > kateonair Wrote: > -------------------------------------------------- > ----- > > JDV, > > > > Thank you very much for the clarification. > > > > BTW,how to define “like companies”? > > > > Thanks. > > It’s a huge question and the answer depends on > what you are doing with the comparison. But I still feel that it correctly answers the question. If the Tobin ratio is considered too general…so is the definition of “like companies”.