Which factors are essential to analyze in sensitivity tables during a DCF?

In a DCF analysis, sensitivity tables are typically used to assess how changes in key assumptions affect the valuation outcome. The discount rate and terminal growth rate are both critical components of this analysis.

The discount rate is essential because it reflects the risk associated with the future cash flows that the company is expected to generate. A higher discount rate will reduce the present value of those cash flows, while a lower rate will increase it. Analyzing different discount rates in sensitivity tables can show how sensitive the valuation is to changes in perceived risk.

The terminal growth rate, on the other hand, is used to estimate the value of cash flows beyond the projection period. It represents the growth expected in perpetuity, thus significantly impacting the terminal value in a DCF model. A small change in the terminal growth rate can lead to substantial changes in the final valuation result, making it a key variable to test in the sensitivity analysis.

By examining both the discount rate and terminal growth rate in sensitivity tables, analysts can better understand the range of potential valuations and the key drivers that influence them, helping stakeholders make more informed decisions.