Financial Terms Tobin's Q

# Definition of Tobin's Q

## Tobin's Q

Market value of assets divided by replacement value of assets. A tobin's Q ratio greater than 1
indicates the firm has done well with its investment decisions.

# Related Terms:

## Q ratio or Tobin's Q ratio

Market value of a firm's assets divided by replacement value of the firm's assets.
Quadratic programming Variant of linear programming whereby the equations are quadratic rather than linear.

## DLOM (discount for lack of marketability)

an amount or percentage deducted from an equity interest to reflect lack of Marketability.

## NPV (net present value of cash flows)

Same as PV, but usually includes a subtraction for an initial cash outlay.

## PV (present value of cash flows)

the value in todayâ€™s dollars of cash flows that occur in different time periods.
present value factor equal to the formula 1/(1 - r)n, where n is the number of years from the valuation date to the cash flow and r is the discount rate.
For business valuation, n should usually be midyear, i.e., n = 0.5, 1.5, . . .

## QMDM (quantitative marketability discount model)

model for calculating DLOM for minority interests r the discount rate

## Acquisition of assets

A merger or consolidation in which an acquirer purchases the selling firm's assets.

The net present value analysis of an asset if financed solely by equity
(present value of un-levered cash flows), plus the present value of any financing decisions (levered cash
flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of
other investment tax credits are calculated separately. This analysis is often used for highly leveraged
transactions such as a leverage buy-out.

## Affirmative covenant

A bond covenant that specifies certain actions the firm must take.

## Assets

A firm's productive resources.

## Assets requirements

A common element of a financial plan that describes projected capital spending and the
proposed uses of net working capital.

## Auction markets

Markets in which the prevailing price is determined through the free interaction of
prospective buyers and sellers, as on the floor of the stock exchange.

## Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair Market
value when the lease expires.

## Bear market

Any Market in which prices are in a declining trend.

## Black market

An illegal Market.

## Bond value

With respect to convertible bonds, the value the security would have if it were not convertible
apart from the conversion option.

## Book value

A company's book value is its total assets minus intangible assets and liabilities, such as debt. A
company's book value might be more or less than its Market value.

## Book value per share

The ratio of stockholder equity to the average number of common shares. Book value
per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation
(and not necessarily Market valuation).

## Brokered market

A Market where an intermediary offers search services to buyers and sellers.

## Bull market

Any Market in which prices are in an upward trend.

## Bulldog market

The foreign Market in the United Kingdom.

## Capital market

The Market for trading long-term debt instruments (those that mature in more than one year).

## Capital market efficiency

Reflects the relative amount of wealth wasted in making transactions. An efficient
capital Market allows the transfer of assets with little wealth loss. See: efficient Market hypothesis.

## Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.

## Capital market line (CML)

The line defined by every combination of the risk-free asset and the Market portfolio.

Book value.

## Cash markets

Also called spot Markets, these are Markets that involve the immediate delivery of a security
or instrument.
Related: derivative Markets.

## Cash-surrender value

An amount the insurance company will pay if the policyholder ends a whole life
insurance policy.

## Closing purchase

A transaction in which the purchaser's intention is to reduce or eliminate a short position in
a stock, or in a given series of options.

## Common market

An agreement between two or more countries that permits the free movement of capital
and labor as well as goods and services.

## Common stock market

The Market for trading equities, not including preferred stock.

## Complete capital market

A Market in which there is a distinct Marketable security for each and every
possible outcome.

## Confirmation

he written statement that follows any "trade" in the securities Markets. Confirmation is issued
immediately after a trade is executed. It spells out settlement date, terms, commission, etc.

## Conversion value

Also called parity value, the value of a convertible security if it is converted immediately.

## Corner A Market

To purchase enough of the available supply of a commodity or stock in order to
manipulate its price.

## Current assets

value of cash, accounts receivable, inventories, Marketable securities and other assets that
could be converted to cash in less than 1 year.

## Dealer market

A Market where traders specializing in particular commodities buy and sell assets for their
own accounts.

## Debt market

The Market for trading debt instruments.

## Derivative markets

Markets for derivative instruments.

## Direct search market

Buyers and sellers seek each other directly and transact directly.

## Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.

## Dividend reinvestment plan (DRP)

Automatic reinvestment of shareholder dividends in more shares of a
company's stock, often without commissions. Some plans provide for the purchase of additional shares at a
discount to Market price. Dividend reinvestment plans allow shareholders to accumulate stock over the Long
term using dollar cost averaging. The DRP is usually administered by the company without charges to the
holder.

## Domestic market

Part of a nation's internal Market representing the mechanisms for issuing and trading
securities of entities domiciled within that nation. Compare external Market and foreign Market.

## Efficient capital market

A Market in which new information is very quickly reflected accurately in share
prices.

## Efficient Market Hypothesis

In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's Market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the Market
return) through either technical analysis or fundamental analysis. Three forms of efficient Market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
information).

## Either-way market

In the interbank Eurodollar deposit Market, an either-way Market is one in which the bid
and offered rates are identical.

## Emerging markets

The financial Markets of developing economies.

## Equilibrium market price of risk

The slope of the capital Market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced Market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.

## Equity market

Related:Stock Market

## Eurocurrency market

The money Market for borrowing and lending currencies that are held in the form of
deposits in banks located outside the countries of the currencies issued as legal tender.

## Excess return on the market portfolio

The difference between the return on the Market portfolio and the
riskless rate.

## Exchange of assets

Acquisition of another company by purchase of its assets in exchange for cash or stock.

## Exercise value

The amount of advantage over a current Market transaction provided by an in-the-money
option.

## Expected return on investment

The return one can expect to earn on an investment. See: capital asset
pricing model.

## Expected value

The weighted average of a probability distribution.

## Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.

## External market

Also referred to as the international Market, the offshore Market, or, more popularly, the
EuroMarket, the mechanism for trading securities that (1) at issuance are offered simultaneously to investors
in a number of countries and (2) are issued outside the jurisdiction of any single country. Related: internal
Market

## Extraordinary positive value

A positive net present value.

See: Par value.

## Fair market price

Amount at which an asset would change hands between two parties, both having
knowledge of the relevant facts. Also referred to as Market price.

## Federal funds market

The Market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.

## Financial assets

Claims on real assets.

## Financial market

An organized institutional structure or mechanism for creating and exchanging financial assets.

## Financing decisions

decisions concerning the liabilities and stockholders' equity side of the firm's balance
sheet, such as the decision to issue bonds.

## Firm

Refers to an order to buy or sell that can be executed without confirmation for some fixed period. Also,
a synonym for company.

## Firm commitment underwriting

An undewriting in which an investment banking firm commits to buy the
entire issue and assumes all financial responsibility for any unsold shares.

## Firm's net value of debt

Total firm value minus total firm debt.

## Firm-specific risk

See:diversifiable risk or unsystematic risk.

## Fixed-income market

The Market for trading bonds and preferred stock.

## Foreign banking market

That portion of domestic bank loans supplied to foreigners for use abroad.

## Foreign bond market

That portion of the domestic bond Market that represents issues floated by foreign
companies to governments.

## Foreign direct investment (FDI)

The acquisition abroad of physical assets such as plant and equipment, with
operating control residing in the parent corporation.

## Foreign equity market

That portion of the domestic equity Market that represents issues floated by foreign companies.

## Foreign market

Part of a nation's internal Market, representing the mechanisms for issuing and trading
securities of entities domiciled outside that nation. Compare external Market and domestic Market.

## Foreign market beta

A measure of foreign Market risk that is derived from the capital asset pricing model.

## Forward market

A Market in which participants agree to trade some commodity, security, or foreign
exchange at a fixed price for future delivery.

## Fourth market

Direct trading in exchange-listed securities between investors without the use of a broker.

## Future investment opportunities

The options to identify additional, more valuable investment opportunities
in the future that result from a current opportunity or operation.

## Future value

The amount of cash at a specified date in the future that is equivalent in value to a specified
sum today.

## Futures market

A Market in which contracts for future delivery of a commodity or a security are bought or sold.

## Gray market

Purchases and sales of eurobonds that occur before the issue price is finally set.

## Growth phase

A phase of development in which a company experiences rapid earnings growth as it produces
new products and expands Market share.

## Guaranteed investment contract (GIC)

A pure investment product in which a life company agrees, for a
single premium, to pay the principal amount of a predetermined annual crediting (interest) rate over the life of
the investment, all of which is paid at the maturity date.

## Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).

## Integer programming

Variant of linear programming whereby the solution values must be integers.

## Intermarket sector

spread The spread between the interest rate offered in two sectors of the bond Market for
issues of the same maturity.

An exchange of one bond for another based on the manager's projection of a
realignment of spreads between sectors of the bond Market.

## Internal market

The mechanisms for issuing and trading securities within a nation, including its domestic
Market and foreign Market.
Compare: external Market.

## Internally efficient market

Operationally efficient Market.

## International market

Related: See external Market.

## International Monetary Market (IMM)

A division of the CME established in 1972 for trading financial
futures. Related: Chicago Mercantile Exchange (CME).

The spread between two issues of the same maturity within a Market sector. For
instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility
corporate bonds.

## Intrinsic value of an option

The amount by which an option is in-the-money. An option which is not in-themoney
has no intrinsic value. Related: in-the-money.

## Intrinsic value of a firm

The present value of a firm's expected future net cash flows discounted by the
required rate of return.

## Inverted market

A futures Market in which the nearer months are selling at price premiums to the more

## Investment analysts

Related: financial analysts

## Investment bank

Financial intermediaries who perform a variety of services, including aiding in the sale of
securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and
institutional clients, and trading for their own accounts. Underwriters.

## Investment decisions

decisions concerning the asset side of a firm's balance sheet, such as the decision to
offer a new product.

A bond that is assigned a rating in the top four categories by commercial credit
rating companies. For example, S&P classifies investment grade bonds as BBB or higher, and Moodys'
classifies investment grade bonds as Ba or higher. Related: High-yield bond.

## Investment income

The revenue from a portfolio of invested assets.
investment management Also called portfolio management and money management, the process of
managing money.

## Investment manager

Also called a portfolio manager and money manager, the individual who manages a
portfolio of investments.

## Investment product line (IPML)

The line of required returns for investment projects as a function of beta
(nondiversifiable risk).