# 29 B C F F S 40 Essay

Submitted By Jamarr5242
Words: 301
Pages: 2

Tobin’s Q what is Tobin’s Q for Smolira Golf? What assumptions are you making about the book value of debt and the market value of debt? What about the book value of assets and the market value of assets? Are these assumptions realistic? Why or why not?

SOLUTION

First, we will find the market value of the company’s equity, which is:
Market value of equity = Shares × Share price
Market value of equity = 20,000(\$43) = \$860,000
The total book value of the company’s debt is:
Total debt = Current liabilities + Long-term debt
Total debt = \$41,769 + 85,000 = \$126,769
Now we can calculate Tobin’s Q, which is:
Tobin’s Q = (Market value of equity + Book value of debt) / Book value of assets
Tobin’s Q = (\$860,000 + 126,769) / \$245,626
Tobin’s Q = 4.02
Using the book value of debt implicitly assumes that the book value of debt is equal to the market value of debt. This will be discussed in more detail in later chapters, but this assumption is generally true. Using the book value of assets assumes that the assets can be replaced at the current value on the balance sheet. There are several reasons this assumption could be flawed. First, inflation during the life of the assets can cause the book value of the assets to understate the market value of the assets. Since assets are recorded at cost when purchased, inflation means that it is more expensive to replace the assets. Second, improvements in technology could mean that the assets could be replaced with more productive, and…