Which of the following is an appropriate example of sensitivity analysis in a DCF?

• A. Revenue growth compared to fixed interest rates
• B. EBITDA margin compared to terminal multiple
• C. Sales volume compared to historical data
• D. Cost of goods sold compared to operating expenses

Answer: (B)

Sensitivity analysis in a discounted cash flow (DCF) model is used to examine how different assumptions or inputs impact the valuation outcome. In the context of the options provided, considering EBITDA margin compared to terminal multiple is relevant because both factors play a crucial role in the final valuation of a company.

The EBITDA margin impacts future cash flows directly by influencing the overall profitability of the company, while the terminal multiple is applied to the projected cash flows or EBITDA to determine the terminal value, which constitutes a significant portion of the total DCF value. By analyzing the relationship between changing EBITDA margins and varying terminal multiples, one can gauge how sensitive the overall valuation is to these pivotal inputs, providing insight into potential risk and upside opportunities.

Other choices do not align as closely with typical sensitivity analysis in a DCF context. For instance, comparing revenue growth to fixed interest rates may not yield direct or relevant insights into valuation metrics, as they are not directly correlated in the context of the DCF model. Additionally, sales volume compared to historical data does not effectively demonstrate the impact of variable inputs on a valuation outcome, since it reflects past performance more than it assesses valuation sensitivity. Likewise, comparing cost of goods sold to operating expenses, while useful for operational analysis, does not directly pertain