Which sensitivity combination would be considered inappropriate in a DCF sensitivity analysis?

Which sensitivity combination would be considered inappropriate in a DCF sensitivity analysis?

• A. EBITDA Margin vs. Terminal Multiple
• B. Terminal Multiple vs Discount Rate
• C. Terminal Multiple vs Long-Term Growth Rate
• D. Revenue Growth vs Terminal Multiple

Answer: (C)

The main idea is that terminal value in a DCF comes from one of two mutually exclusive methods: a multiple of a metric (like EBITDA) or a perpetuity growth model using a long-term growth rate. In a sensitivity analysis, you want inputs that move the same mechanism consistently. Varying the terminal value with both a terminal multiple and a long-run growth rate mixes the two approaches, which makes the sensitivity hard to interpret and potentially misleading. Put differently, the long-term growth rate applies to the perpetuity formula, while the terminal multiple applies to the multiples approach. Pairing them in the same scenario isn’t coherent, so this combination is inappropriate. The other pairings keep the terminal-value mechanism consistent or separate it cleanly, which is how sensitivity analyses are meant to be read.

The main idea is that terminal value in a DCF comes from one of two mutually exclusive methods: a multiple of a metric (like EBITDA) or a perpetuity growth model using a long-term growth rate. In a sensitivity analysis, you want inputs that move the same mechanism consistently. Varying the terminal value with both a terminal multiple and a long-run growth rate mixes the two approaches, which makes the sensitivity hard to interpret and potentially misleading. Put differently, the long-term growth rate applies to the perpetuity formula, while the terminal multiple applies to the multiples approach. Pairing them in the same scenario isn’t coherent, so this combination is inappropriate. The other pairings keep the terminal-value mechanism consistent or separate it cleanly, which is how sensitivity analyses are meant to be read.