Question

Please rate the following statement as "TRUE" of "FALSE":

"The key underlying assumption of the WACC is that the CAPM holds. Thus, the WACC model implicitly assumes that: (1) all risk that matters is systematic (market driven) in nature (2) and all assets have zero alphas, and thus no opportunity for superior risk-adjusted returns. Yet, we still apply the WACC to value a firm's fair stock price, which would be a nonsensical exercise to perform if we truly believed all firms are always perfectly priced and have zero alpha opportunity".

		TRUE
		FALSE

Answer 1

Yes this statement is FALSE

Because with the WACC valuation we tries to find the fair value of the security, if the actual market price of the security is less than its fair value it will be a undervalued security and we should buy such securities, because according to researchers the stocks are fairly priced in long run so we shoul buy the security when it's undervalued and sell it as it gets fairly priced, so finding the value of the stock Using the WACC is not useless excersice.