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

Sensitivity analysis shows how the DCF output changes when key inputs like growth rate or discount rate are varied.

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

WACC and terminal growth rate are the most impactful and uncertain inputs, making them the standard pair for DCF sensitivity tables.

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

A wide range in the sensitivity table indicates that small changes in assumptions produce large swings in valuation, signaling high model sensitivity.

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

A higher WACC increases the discount rate, reducing the present value of future cash flows and thus the implied share price.

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

Excel's Data Table feature under What-If Analysis allows analysts to automatically populate a grid of outputs for two varying inputs.

DCF - Discounted Cash Flow Practice Test

DCF - Discounted Cash Flow Practice Test

DCF DCF Sensitivity Analysis