DCF DCF Sensitivity Analysis

Question 1

What is the primary purpose of a sensitivity analysis in a DCF model?

Accepted Answer

To show how changes in key assumptions affect valuation

Answer

To calculate the exact intrinsic value of a company

Answer

To determine the cost of equity using CAPM

Answer

To forecast free cash flow for 10 years

Question 2

In a two-variable sensitivity table for DCF, which two inputs are most commonly tested together?

Accepted Answer

WACC and terminal growth rate

Answer

Revenue growth and tax rate

Answer

CapEx and depreciation

Answer

Net income and dividends

Question 3

A DCF model shows a base-case valuation of $50/share. A sensitivity table shows values ranging from $35 to $70. What does this wide range indicate?

Accepted Answer

The valuation is highly sensitive to input assumptions

Answer

The company's stock is incorrectly priced

Answer

The terminal value was calculated incorrectly

Answer

The free cash flows are too volatile to model

Question 4

If you increase the WACC in a DCF model while holding all else constant, what happens to the implied share price?

Accepted Answer

It decreases

Answer

It increases

Answer

It stays the same

Answer

It doubles

Question 5

Which tool in Excel is most commonly used to build a two-variable DCF sensitivity table?

Accepted Answer

Data Table (What-If Analysis)

Answer

Goal Seek

Answer

Solver

Answer

Pivot Table

Question 6

In a DCF sensitivity analysis, what does a 'tornado chart' visually represent?

Accepted Answer

The relative impact of each variable on the final valuation

Answer

The historical stock price volatility

Answer

The probability distribution of cash flows

Answer

The correlation between revenue and EBITDA