Which formula represents Tobin's q?

Tobin's q is a key concept in finance that relates the market value of a firm to the replacement cost of its assets. Specifically, it is defined as the ratio of the market value of a company's assets (which includes both debt and equity) to the replacement cost of those assets. When Tobin's q is greater than 1, it indicates that the market values the firm more highly than it would cost to replace its assets, often signaling opportunities for investment and growth. Conversely, a q less than 1 suggests that the market values the firm less than the cost of replacing its assets, indicating potential underperformance or overvaluation.

The correct formula reflects this concept accurately by considering both the market value of debt and equity in relation to the total replacement cost of those assets. This provides a comprehensive view of the firm’s value compared to the cost of its assets, which is critical for investment decisions and understanding firm valuation in the context of growth opportunities.