This paper develops the dynamic equilibrium model of capital structure and investment decisions of value and growth firms. Although Q ratio monotonically increases with the share of growth options in total rm value, it is yet to be a perfect proxy of growth options since Q ratio is also affected by a rm's production technology. Capitalintensive rms not only have higher returns from investments and thus larger growth options but also likely have invested in more capital in the past. Thus, capital-intensive rms may have lower Q ratio even when they have higher growth options. Understanding the intra- and inter-rm variations of Q ratio can explain why leverage and protability are important determinants of investment policy. The simulation also assures that the model can successfully match the moments of riskfree interest rates, stock market excess returns, value premium and credit spreads.