A Simple Approximation of Tobin's q

Running head: A SIMPLE APPROXIMATE Q 1
An Analysis of Simple Approximation of Tobin’s Q
Zarin Tasnim Chowdhury
Army Institute of Business Administration

A SIMPLE APPROXIMATE Q 2
Abstract
This research paper discusses the simple approximation of Tobins Q on DSE listed financial
institution named City Bank Limited. Tobins q ratio is a measure of a firms assets relative to
its market value. The main objective of this paper is to find out whether the market value of
City Bank is overrated or underrated. To conduct the analysis, the paper gives brief review of
Tobin’s q / approximate q, uses financial statement of City Bank from year 2015 to 2019 for
the computational process of simple approximate q, interpreting the situation of the bank from
the outcomes, provides graphical representation for better understanding and finally
concluded the paper by mentioning findings from this research.

Introduction
Tobin’s q is the ratio of market value of a company’s assets to the replacement value of those
assets. Tobin’s q measures the wealth generated by a company for its shareholders. It
compares how much more a company is worth when compared to the book value of its assets.
The Q ratio was popularized by Novel Laureate James Tobin and invented in 1966 by
Nicholas Kaldor. The main objective of this ratio is to find out whether the market value of a
firm is undervalued(less than 1), overvalued (above 1) or fairly valued (equal to 1).
(XPLAIND, 2010) (ADAM HAYES, 2021)
There are two computational process one is Tobin’s q and another one is simple approximate
q. Both of these processes generate similar outcomes. However, the second process is much
simpler compared to first one and a very popular “short-cut” technique for the calculation.
The formula requires only basic financial and accounting information’s. (Pruitt, 1994)
Although, Tobin’s q is very useful and popular method in terms of finding out the market
value of a company by estimating the stocks fair value and also can be practically used by
market participants to make crucial decisions but it has some criticisms like any other
techniques.
Some criticism or limitations of this technique –
Exact replacement cost for all other assets may not be available as a secondary market
for used equipment’s may not be always available for all the assets.
It cannot be used to base investment decisions with regards to purchase/sale of equity
shares.
Valuation of tangible assets are not easy to value. So sometimes the ratio also fails to
predict accurate market value of a company. (Finance Management, 2021)

Computational process of approximate q of City Bank
Year 2015:
Market Value of Equity (MVE) = Numbers of outstanding share* Market price per share
= (875.8*20.4) in BDT millions
= 17,866 in BDT millions
Current assets = Total assets - fixed assets
= (2, 14,840- 8,136) in BDT millions
= 2, 06, 704 in BDT millions
Debt = Total liabilities – Current assets
= (1, 89,331- 2, 06,704) in BDT millions
= - 17,373 in BDT millions
Approximate q = MVE+Preferred stock+ Debt
Total assets
= 17,866+0−17,373
2,14,840
= 0.002
Year 2016:
Market Value of Equity (MVE) = Numbers of outstanding share* Market price per share
= (875.8*27.2) in BDT millions
= 23,822 in BDT millions
Current assets = Total assets - fixed assets
= (2, 59,424- 8,085) in BDT millions
= 2, 51,339 in BDT millions
Debt = Total liabilities – Current assets
= (2, 34,123 – 2, 51,339) in BDT millions