Economics • Economic BasicsMedium
What does the 'Tobin's q' ratio measure in investment theory?
A. The ratio of a firm's market value to the replacement cost of its physical assets✓ Correct Answer
B. The ratio of corporate debt to equity holdings
C. The speed at which central bank monetary policy transmits to the real economy
D. The elasticity of substitution between capital and labor inputs
💡 Solution & Explanation
Tobin q ratio evaluates financial investment by comparing a corporation market valuation against the replacement cost of its underlying physical assets. A ratio exceeding unity suggests that market value surpasses asset replacement costs, signaling favorable conditions for capital investment expansion. In contrast, alternative measures focus strictly on leverage ratios like debt-to-equity rather than market-to-replacement valuations.
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