what are the different alternative methods to compute Tobin's Q?
Dear Srikanth
For public firms you can use this formula:
((Stock market price per common share X number of common shares) +(Stock market price of preferred shares X number of preferred shares) + (market value of publicly-traded debt) + (book value of remaining debt items))/(Total book value of assets)
where book value is the same as the balance sheet figure
Tobin's Q was originally defined as equal to the market value of the assets divided by the replacement cost of the assets. This work well if you are talking about a physical asset like a residential house where you can buy an existing house in the retail market or instead buy land and build a new house.
Raymond A. K. Cox
Thompson Rivers University
Dear Raymond
In the second formula your means is fair market value or just market value?
Dear Hossien
Ideally it would be the actual market value (verifiable from an actual transaction). However, if there is no actual transaction with the market price then an expert/consultant would need to estimate that market price and it would become the fair market value.
Hi Srikanth
Several papers have been studied and proposed different techniques for calculating Tobin’s Q. Some of which are:
· Wang Jinqiang Yang (2017). Investment, Tobin’s q, and Interest Rates. Journal of Financial Economics, 1-47.
· Chong Wang, Neng Wang, Jinqiang Yang Xiaoji Lin, Chong Wang, Neng (2013).
Investment, Tobin's q, and Interest Rates. http://www.nber.org/papers/w19327.
· Downing, C., D. Jaffee, and N. Wallace, 2009, “Is the market for mortgage-backed securities a market for lemons?” Review of Financial Studies, 22, 2457-2494.
· Gourio, F., and M. Michaux, 2011, “Stochastic volatility, bond yields, and the Q theory of investment,”Working paper, Boston University.
· Hennessy, C. A., and T. M. Whited, 2007, “How costly is external financing? Evidence from a structural estimation, ”Journal of Finance, 62, 1705-1745.
· Hennessy, C. A., and T. M. Whited, 2005, “Debt dynamics,”Journal of Finance, 60, 1129- 1165.
Regards,
Zuhair
Tobin's Q = Total Market Value of Firm / Total Asset Value of Firm
For example, let's say Company XYZ has $40 million of assets, 10 million shares outstandingand a current share price of $3. Using the formula, we can calculate that Tobin's Q is:
Tobin's Q = (10,000,000 x $3) / $40,000,000 = 0.75
Dear All....The concept of Q should be applied in spirit as the concept of equilibrium which equates the market value of a firm to its book value......
Hi Srikanth Sir,
I am current working in the field of Intellectual Capital and I am studying the impact of Intellectual Capital on Tobin's Q ratio. Going through a lot research paper, I have calculated Tobin's Q using the following formula:
Tobins' Q= Market Value/ Replacement Value
Where, Market Value= share price x number of shares outstanding
Replacement value= Book value + current assets
Book Value= Book value per share x number of shares
Items directly found in the financial statements of the company (share price, number of shares, current assets and book value per share).
I hope this helps you.
Regards,
Kanishka Gupta
Tobin's Q=(the market value of common stock + book value of preferred stock + (current liabilities – current assets) + long-term debts)/book value of total assets, measured at fiscal year-end in period t;
Agree with the formulas above. You can also get already a calculated ratio from Thomson Reuters. They also write the formula they use for calculations.
Good luck with your research!
I used in my study,
market value of equity plus book value of debt, divided by book value of assets .
Tatiana Garanina Dear Tatiana could you please tell me the steps for fin Tobin's Q ratio from Thomson Reuters Ekion!
I think most simple formula is
Tobin's Q=Market capitalisation/Total assets value
Tobin's q is defined as the ratio between the market value and the replacement cost of an asset. Investment decisions depend on the level of this ratio. If q is greater than one, then a company will have incentives to invest in the addition of new physical capital, since this will increase its market value. Conversely, if q is less than one, firms will let their capital stock depreciate. This behaviour will lead to Tobin's q oscillating around unity in the long run, where gross investment will be equal to depreciation and the capital stock will be in equilibrium. Based on the above, and considering that the value of the firm is determined from the sum of its discounted future cash flow, this would be the fundamental channel through which monetary policy would affect aggregate demand.
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