Sensitivity Analysis: How Changing Assumptions Moves the Valuation
A DCF model says a stock is worth $48 per share. Change the discount rate by one percentage point and the answer moves to $58 or drops to $40. Sensitivity analysis tests how a valuation changes when you adjust the assumptions behind it, showing which inputs matter most and how wide the range of reasonable outcomes really is.
Key takeaway: Sensitivity analysis shows how much a valuation moves when key assumptions change. One-way tables isolate the effect of a single variable. Two-way tables show how two variables interact. The size of the output swing tells you which assumptions deserve the most scrutiny.
The Base Case
Start with a five-year DCF for a mid-size consumer products company:
| Value | |
|---|---|
| Most Recent FCF | $40M |
| FCF Growth (Years 1-5) | 7% per year |
| Terminal Growth Rate | 2.5% |
| WACC | 10% |
| Net Debt | $180M |
| Shares Outstanding | 10,000,000 |
Growing FCF at 7% for five years, applying a 2.5% terminal growth rate, and discounting at 10% produces an enterprise value of $660M. Subtract net debt and divide by shares outstanding:
Enterprise Value: $660M
- Net Debt: $180M
Equity Value: $480M
/ Shares: 10M
Implied Share Price: $48
That $48 is one number built on several assumptions. The question is how much it moves when those assumptions change.
Varying One Assumption at a Time
A one-way sensitivity table holds everything else constant and changes a single input. Start with WACC, the discount rate that determines how much future cash flows are worth today.
| WACC | Implied Share Price |
|---|---|
| 8.5% | $65 |
| 9.0% | $58 |
| 9.5% | $53 |
| 10.0% | $48 |
| 10.5% | $44 |
| 11.0% | $40 |
| 11.5% | $37 |
Moving WACC from 10% down to 8.5% raises the share price from $48 to $65. Moving it up to 11.5% drops the price to $37. The full range is $28, roughly 60% of the base case value, from a 3-point swing in a single input.
WACC has this effect because it compounds across every year of the projection and the terminal value. A small change in the rate applied to hundreds of millions in terminal value creates a large swing in present value.
Now vary the FCF growth rate during the five-year projection period:
| FCF Growth | Implied Share Price |
|---|---|
| 4% | $40 |
| 5% | $43 |
| 6% | $45 |
| 7% | $48 |
| 8% | $51 |
| 9% | $54 |
| 10% | $57 |
Each percentage point of FCF growth moves the share price by about $3. The full range is $17, compared to $28 for WACC. Near-term growth matters, but less than the discount rate, because it only affects five years of cash flow while WACC affects the entire stream including terminal value.
Varying Two Assumptions at Once
A two-way sensitivity table changes two inputs simultaneously. One variable runs across the top, the other down the side, and the output fills each cell.
Here is WACC against the terminal growth rate, the two assumptions that dominate terminal value:
| g = 1.5% | g = 2.0% | g = 2.5% | g = 3.0% | g = 3.5% | |
|---|---|---|---|---|---|
| WACC = 9.0% | $50 | $54 | $58 | $64 | $70 |
| WACC = 9.5% | $46 | $49 | $53 | $57 | $62 |
| WACC = 10.0% | $42 | $45 | $48 | $52 | $56 |
| WACC = 10.5% | $39 | $41 | $44 | $47 | $51 |
| WACC = 11.0% | $36 | $38 | $40 | $43 | $46 |
The base case sits at the center. The table ranges from $36 (high WACC, low growth) to $70 (low WACC, high growth), nearly a 2x spread from just two percentage points of variation in each input.
The corners tell the story. The bottom-left ($36) represents the bearish case: the company's cost of capital is higher than estimated and long-term growth is slower. The top-right ($70) is the bull case. No analyst can say with certainty which corner is closer to reality, so the table gives the reader a range instead of a single number.
Notice that the gap widens as you move toward lower WACC values. At 9.0%, each half-point of terminal growth adds $4 to $6 to the share price. At 11.0%, the same change adds only $2 to $3. Lower discount rates amplify the effect of growth because more of the company's value sits in the distant future, where the terminal growth rate has the most influence.
Which Assumptions Move the Price
Comparing the one-way results side by side reveals a clear hierarchy:
| Assumption | Range Tested | Share Price Range | Spread |
|---|---|---|---|
| WACC | 8.5% to 11.5% | $37 to $65 | $28 |
| FCF Growth (Years 1-5) | 4% to 10% | $40 to $57 | $17 |
| Terminal Growth Rate | 1.5% to 3.5% | $42 to $56 | $14 |
The raw spreads are useful, but the ranges tested aren't equal. WACC varies over 3 percentage points, FCF growth over 6, and terminal growth over 2. Adjusting for that, WACC moves the share price by roughly $9 per percentage point, the terminal growth rate by about $7, and near-term FCF growth by about $3.
The pattern holds across most DCF models. WACC and the terminal growth rate carry the most weight because they both flow through the terminal value, which typically accounts for 60-80% of enterprise value. The near-term operating forecast, while important for earnings estimates, affects a smaller portion of the total.
When you find that a valuation is highly sensitive to one assumption, that is a signal to pressure-test it. If the share price swings $28 on WACC alone, the precision of your WACC estimate matters more than a detailed build of next quarter's revenue.
Why Sensitivity Analysis Matters
Sensitivity analysis appears throughout corporate finance:
- Equity research: Analysts present DCF results as a valuation range rather than a single number. The sensitivity table shows readers which assumptions drive the range and how confident the analyst needs to be in each one.
- M&A and LBO modeling: Buyers test how the return on an acquisition changes with different exit multiples, debt costs, and growth rates. The sensitivity table identifies the assumptions that make or break the deal.
- Capital budgeting: Project managers vary revenue, cost, and discount rate assumptions to see whether an NPV stays positive across a realistic range of outcomes. A project that only works under the most optimistic inputs is riskier than one that clears the hurdle under conservative assumptions.
- Board presentations: A single-point valuation invites the question "what if you're wrong?" A sensitivity table answers it directly, showing how much the answer changes and in which direction.
Conclusion
Sensitivity analysis converts a single-point estimate into a range by varying the assumptions behind it. One-way tables isolate the impact of individual inputs, two-way tables show how pairs of assumptions interact, and the spread between the best and worst cases tells you which variables deserve the closest attention.
For the DCF framework that sensitivity analysis is typically built on, see our guide on DCF valuation. For the discount rate that drives most of the sensitivity in a DCF, see our guide on WACC. For a market-based approach that sidesteps these assumption-driven swings, see our guide on comparable company analysis.
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