DCF Sensitivity Analysis: Flexing WACC and Growth

DCF sensitivity analysis flexes the assumptions that drive valuation, usually WACC, terminal growth, exit multiple, revenue growth, margin, or capex, to show a range rather than one false-precise value. In interviews, the classic sensitivity table has WACC on one axis and perpetuity growth or exit multiple on the other. Corporate Finance Institute defines sensitivity analysis as testing how different independent variables affect a dependent variable under specific conditions. In a DCF, the dependent variable is enterprise value or implied share price. This article builds on WACC, terminal value, and walk me through a DCF.

TL;DR

• Sensitivity analysis shows a valuation range, not a single point estimate.
• The classic DCF table flexes WACC and terminal growth rate.
• Higher WACC lowers valuation; higher terminal growth raises valuation.
• A 2-variable table is usually enough for interviews.
• Sensitivities are only useful when the input range is realistic.

What is DCF sensitivity analysis?

DCF sensitivity analysis is a what-if table that changes key assumptions and shows the impact on valuation. CFI describes sensitivity analysis as a financial modeling tool used to analyze how independent variables affect a dependent variable. In a DCF, independent variables might be WACC and terminal growth, while the output is enterprise value. The purpose is practical: no one knows the exact right WACC or terminal growth rate. A sensitivity table shows whether the valuation conclusion still holds when reasonable assumptions move.

Which assumptions should you flex?

Flex the assumptions that matter most and are most uncertain. For an unlevered DCF, WACC and terminal value assumptions usually dominate because terminal value often represents a large share of total enterprise value. For an operating forecast, you may also flex revenue growth, EBITDA margin, capex as a percentage of revenue, or change in working capital. Do not flex everything. A model with 12 sensitivity tables creates noise. A banker wants to know the 2 or 3 assumptions that can actually change the recommendation.

Sensitivity	Typical axis 1	Typical axis 2	Best use
Perpetuity growth DCF	WACC	Terminal growth	Mature company
Exit multiple DCF	WACC	Exit multiple	Market-multiple framing
Operating case	Revenue growth	EBITDA margin	Forecast risk
LBO returns	Exit multiple	Leverage	Sponsor outcome

How do WACC and growth affect valuation?

Higher WACC lowers valuation because future cash flows are discounted at a higher required return. Higher terminal growth raises valuation because the business is assumed to grow faster after the forecast period. The perpetuity-growth terminal value formula is:

$\text{Terminal Value} = \frac{\text{FCF}_{n+1}}{\text{WACC} - g}$

The denominator explains the sensitivity. If WACC rises from 10 percent to 11 percent while growth stays at 3 percent, the denominator rises from 7 percent to 8 percent, which lowers terminal value sharply. If growth rises from 3 percent to 4 percent while WACC stays at 10 percent, the denominator falls from 7 percent to 6 percent, increasing terminal value.

What is a worked sensitivity example?

Suppose next-year terminal free cash flow is 100 million dollars. At a 10 percent WACC and 3 percent terminal growth, terminal value is 100 divided by 7 percent, or 1,429 million dollars. At 11 percent WACC and 3 percent growth, terminal value is 100 divided by 8 percent, or 1,250 million dollars. At 10 percent WACC and 4 percent growth, terminal value is 100 divided by 6 percent, or 1,667 million dollars.

WACC / growth	2.5%	3.0%	3.5%
9.5%	1,429M	1,538M	1,667M
10.0%	1,333M	1,429M	1,538M
10.5%	1,250M	1,333M	1,429M

The table shows why a DCF should be read as a range.

How do you explain a sensitivity table in an interview?

Say the base case matters, but the sensitivity table tells you whether the valuation is robust. If all reasonable WACC and growth cases imply value above the current trading price, the DCF supports upside. If only aggressive assumptions produce upside, the conclusion is weak. Then name the main driver. For example, "The valuation is most sensitive to terminal growth because a 50 basis point change moves terminal value by more than the same proportional change in near-term revenue." Keep the answer tied to decision-making, not Excel mechanics.

Also explain what you would do with the table. In a sell-side pitch, the sensitivity helps set an asking-price range and prepare the client for buyer pushback. In a fairness analysis, it shows whether the deal price sits inside a defensible valuation range. In an interview, that practical use matters because a sensitivity table is not decoration. It is how bankers keep one input assumption from pretending to be certainty.

Frequently Asked Questions

Is sensitivity analysis the same as scenario analysis?

No. Sensitivity analysis changes one or two inputs across a range. Scenario analysis changes a coherent case, such as recession, base, and upside, with multiple assumptions moving together.

What variables are most common in a DCF sensitivity?

WACC and terminal growth are most common for a perpetuity-growth DCF. WACC and exit multiple are most common for an exit-multiple DCF.

Why does WACC have such a large effect?

WACC appears in the discount rate and often in the terminal value denominator. Small changes can materially change present value, especially when terminal value is large.

How wide should the sensitivity range be?

Use realistic ranges. A typical table might flex WACC by 50 or 100 basis points around the base case and terminal growth by 25 or 50 basis points.

Does sensitivity analysis fix bad assumptions?

No. It reveals how much the valuation depends on assumptions. If the base forecast is weak, sensitivity analysis only shows different versions of a weak model.

Sources

• Corporate Finance Institute, "Sensitivity Analysis": https://corporatefinanceinstitute.com/resources/financial-modeling/what-is-sensitivity-analysis/ (checked July 2026)
• Wall Street Prep, "DCF Model Training Guide": https://www.wallstreetprep.com/knowledge/dcf-model-training-6-steps-building-dcf-model-excel/ (checked July 2026)