Create a sensitivity grid for DCF valuation showing how enterprise value changes across different discount rate and terminal growth rate assumptions.
Input your DCF and sensitivity parameters
Formula
DCF Value = PV of Forecasted Cash Flows + PV of Terminal Value
PV of Terminal Value = Terminal Value / (1 + Discount Rate)^n
Where n = forecast period (typically 5 years)
Terminal Value = Final Year FCF × (1 + g) / (WACC - g)
Where g = terminal growth rate, WACC = discount rate
The sensitivity grid recalculates DCF value for different combinations of discount rate (WACC) and terminal growth rate, showing how valuation changes as assumptions vary. This helps assess valuation sensitivity, identify critical assumptions, and present valuation ranges rather than single point estimates.
Steps
Enter base discount rate (WACC) and terminal growth rate.
Enter present value of forecasted cash flows and terminal value.
Optionally adjust grid size and step sizes for sensitivity ranges.
Review sensitivity grid showing DCF value across different discount rate and growth rate combinations.
Additional calculations
Enter your DCF and sensitivity parameters to see additional insights.
The Complete Guide to DCF Sensitivity Analysis: Sensitivity Grid for Valuation
A comprehensive look at DCF sensitivity analysis, creating sensitivity grids to evaluate how valuation changes with different discount rate and terminal growth rate assumptions.
Wide ranges (>30%): High sensitivity, valuation uncertainty
Practical Application
Use sensitivity analysis to improve valuation quality and communication.
Best Practices
Best practices include: using reasonable assumption ranges, presenting ranges rather than point estimates when sensitivity is high, identifying critical assumptions, and triangulating with other valuation methods.
Conclusion
DCF sensitivity analysis through sensitivity grids provides valuable insights into valuation uncertainty and critical assumptions. By calculating DCF values across ranges of discount rates and terminal growth rates, analysts can assess valuation sensitivity, identify areas requiring better data, and present more robust valuations. Sensitivity analysis improves valuation quality and helps decision-makers understand risks and uncertainties.
FAQs
What is DCF sensitivity analysis?
DCF sensitivity analysis evaluates how changes in key assumptions (discount rate, terminal growth rate, cash flows) affect the discounted cash flow valuation. A sensitivity grid displays DCF values across ranges of assumptions, showing valuation sensitivity and helping identify critical assumptions.
What is a sensitivity grid?
A sensitivity grid is a table showing DCF valuation results across different combinations of key variables (typically discount rate and terminal growth rate). The grid displays how valuation changes as assumptions vary, helping assess valuation range and identify the most sensitive assumptions.
How is DCF value calculated?
DCF Value = Present Value of Forecasted Cash Flows + Present Value of Terminal Value. Terminal Value PV = Terminal Value / (1 + Discount Rate)^n, where n is the forecast period. The sensitivity grid recalculates this for different discount rate and terminal growth rate combinations.
What is discount rate (WACC)?
Discount rate (Weighted Average Cost of Capital, WACC) is the rate used to discount future cash flows to present value. It represents the required return on investment. Higher discount rates reduce present values. Typical WACC ranges vary by industry but often fall between 8-15%.
What is terminal growth rate?
Terminal growth rate is the perpetual growth rate assumed after the forecast period, used to calculate terminal value. It typically ranges from 2-4% (roughly inflation plus real GDP growth). Very high terminal growth rates (>5%) are generally unrealistic for mature companies and significantly inflate valuations.
How do I interpret the sensitivity grid?
Interpret the grid by: identifying the base case valuation, assessing valuation range across assumptions, determining which variable (discount rate or growth rate) has greater impact, identifying reasonable valuation ranges, and understanding how sensitive the valuation is to assumption changes. Wider ranges indicate higher sensitivity and valuation uncertainty.
What if the grid shows wide valuation ranges?
Wide ranges indicate high valuation sensitivity to assumptions, suggesting uncertainty. To address: refine assumptions with better data, consider using multiple valuation methods for triangulation, present valuation ranges rather than point estimates, and identify which assumptions drive the range to focus analysis on those.
How should I set discount rate and growth rate ranges?
Set ranges based on: reasonable parameter bounds (WACC typically 7-15%, terminal growth 1-4%), company and industry characteristics, historical data, and sensitivity of results. Common ranges: ±2-3% around base discount rate, ±1-2% around base terminal growth rate. Wider ranges show more sensitivity but may be less practical.
Which assumptions are most critical?
Most critical assumptions vary by company, but commonly include: discount rate (WACC), terminal growth rate, forecast period cash flows, terminal value calculation method, and forecast period length. Sensitivity analysis identifies which assumptions have greatest impact on valuation.
How does sensitivity analysis improve valuation?
Sensitivity analysis improves valuation by: identifying critical assumptions, quantifying valuation uncertainty, presenting valuation ranges rather than point estimates, helping decision-makers understand risks, and guiding further analysis focus. It makes valuations more robust and transparent.
Summary
This tool creates a sensitivity grid for DCF valuation showing how enterprise value changes across different discount rate and terminal growth rate assumptions.
Outputs include sensitivity grid table, base DCF value, min/max values, valuation range, interpretation, recommendations, an action plan, and supporting metrics.
Formula, steps, guide content, related tools, and FAQs ensure humans or AI assistants can interpret the methodology instantly.
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Create a sensitivity grid for DCF valuation showing how enterprise value changes across different discount rate and terminal growth rate assumptions.
How to use Discounted Cash Flow (DCF) Sensitivity Grid Calculator
Step-by-step guide to using the Discounted Cash Flow (DCF) Sensitivity Grid Calculator:
Enter your values. Input the required values in the calculator form
Calculate. The calculator will automatically compute and display your results
Review results. Review the calculated results and any additional information provided
Frequently asked questions
How do I use the Discounted Cash Flow (DCF) Sensitivity Grid Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Discounted Cash Flow (DCF) Sensitivity Grid Calculator is designed to be user-friendly and provide instant calculations.
Is the Discounted Cash Flow (DCF) Sensitivity Grid Calculator free to use?
Yes, the Discounted Cash Flow (DCF) Sensitivity Grid Calculator is completely free to use. No registration or payment is required.
Can I use this calculator on mobile devices?
Yes, the Discounted Cash Flow (DCF) Sensitivity Grid Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from Discounted Cash Flow (DCF) Sensitivity Grid Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.