# Tobin's Q

I know the formula is (Market value of Debt + Equity)/Replacement Cost of Total Assets, but i am not sure whether you want this number to be high or low. Can someone please help explain?

High -> would mean there is a bigger value in the market for the same assets - so you would want to invest more in those assets.

Not sure if this makes sense but when I come up across these funky ratios = I apply the numerator-denominator rule. You have the market value in numerator and costs/liabilities in denominator you want a larger ratio and vice versa.

^agree. This ratio seemed random to me when I read over the schweser notes.

cpk123 Wrote: ------------------------------------------------------- > High -> would mean there is a bigger value in the > market for the same assets - so you would want to > invest more in those assets. Not sure I follow that. For a given firm, Tobin’s Q tends to mean-revert over time. And values for all players in a given industry should converge if you talk to an economist. So I view Q as similar to any other market multiple, such as P/E. If it’s high then the market is pricing in expected profitability and/or growth. But would you buy a firm trading at 50x P/E?

who or what is Tobin? did I miss the memo.

yes what is / where can I find tobin’s Q ? could someone please elaborate. (well Wiki wont help with the page # in my Schweser books )

V4, Pg 589 --> Chapter on Residual Income Valuation. Says - in the book - higher productivity of Corp’s assets - higher Tobin’s q. However, difficulty lies in determining the replacement cost of the assets…

Thanks CP.

Agree with CP and DarienHacker. With CP on Tobin Q reflecting increased Productivity of that company’s Assets. And with Darien, that this increased Productivity has already been priced in the value of the company (as reflected in the numerator, the market value of company). So, it may or may not be a good investment, just based on its high Tobin Q multiple.

I think I saw Tobin hanging on the corner of 33rd and 3rd…