Sensitivity Analysis: WACC vs. Terminal Growth Rate

Step 1: Terminal Value Across Scenarios

Terminal Value = FCFₙ × (1 + g) / (WACC − g)

Using the Year 5 FCF of $100.0m across each combination of WACC and terminal growth rate (g):

Terminal Value represents the lump-sum value of all cash flows beyond the explicit forecast period, discounted back to the end of Year 5. It typically makes up 60–80% of total Enterprise Value in a DCF, so small changes in its two inputs (WACC and g) can swing the whole valuation meaningfully — which is exactly what this sensitivity table is built to show.

Step 2: Present Value of Terminal Value

PV of Terminal Value = Terminal Value / (1 + WACC)^n

Where: n = 5, the number of years being discounted back to today.

Discounting each Terminal Value back five years at its respective WACC:

This step puts Terminal Value on the same time basis as the explicit-period cash flows so the two can be added together. Notice that WACC is doing double duty here: it already shrank the numerator's denominator in Step 1 (WACC − g), and now it also shrinks the value again through the discounting term (1+WACC)^n. That double exposure is why WACC ends up moving Enterprise Value more than the terminal growth rate does, as you'll see in Step 4.

Step 3: Enterprise Value

Enterprise Value = PV of Explicit-Period FCFs + PV of Terminal Value

Adding the $150.0m of explicit-period FCF value to each PV of Terminal Value:

This 3x3 grid is the finished sensitivity table — it's the standard way DCF outputs are presented in a pitch book or model, because it shows a range of outcomes instead of a single misleadingly precise number. The center cell (WACC 9.0%, g 2.5%) is the base case.

Step 4: Which Assumption Moves Enterprise Value More?

Holding terminal growth constant and measuring the spread across the three WACC scenarios:

Average range from varying WACC: (365.1 + 419.9 + 488.4) / 3 = $424.5m.

Holding WACC constant and measuring the spread across the three terminal growth scenarios:

Average range from varying terminal growth: (245.2 + 168.7 + 121.9) / 3 = $178.6m.

Enterprise Value is roughly 2.4x more sensitive to WACC than to the terminal growth rate over these ranges ($424.5m vs. $178.6m). This matches the intuition from Step 2: WACC affects value through two separate channels in the terminal value calculation, while terminal growth only affects one.

Final Results

• Base Case Enterprise Value (WACC 9.0%, g 2.5%): $1,174.9m
• Enterprise Value range from WACC alone (g held at 2.5%): $419.9m ($998.7m–$1,418.6m)
• Enterprise Value range from terminal growth alone (WACC held at 9.0%): $168.7m ($1,097.0m–$1,265.7m)
• Conclusion: Enterprise Value is ~2.4x more sensitive to WACC than to the terminal growth rate over these ranges

This is why bankers and PE professionals present DCF valuations as a range rather than a single point estimate, and why analysts spend more time defending their WACC assumptions than their terminal growth assumptions in a live deal process.

Would you like to explore how adding a third variable — such as an EBITDA exit multiple in a perpetuity-vs-exit-multiple hybrid approach — would change this sensitivity picture?