Mechanics

Sensitivity Analysis for Terminal Value

Terminal value is the most sensitive output in a DCF. A defensible valuation publishes the sensitivity table alongside the headline target. Two-way tables on g vs WACC and exit-multiple vs WACC are the standard.

Direct answer

Show a two-way sensitivity table for the headline target across the two most-sensitive inputs. For Gordon Growth, that is g (rows) by WACC (columns) with the central estimate in the middle and 25-to-50 basis point steps in each direction. For exit multiple, that is multiple (rows) by WACC (columns). The corners of the table reveal whether the recommendation survives a reasonable input shock.

What to flex

The four high-leverage inputs

Perpetuity growth rate g

Each 25bp move in g moves the Gordon TV by a meaningful percentage. Flex 100bps in each direction from the central estimate.

WACC

Each 25bp move in WACC moves TV more than 25bp because of the convex denominator. Flex 100bps in each direction.

Exit EV/EBITDA multiple

Flex one full turn in each direction (e.g. 8.0x to 12.0x around a 10.0x central estimate).

Terminal-year EBITDA

Flex by the spread between LTM and run-rate, or by a margin sensitivity of 100bps. Quietly assumed and rarely flexed in published work.

Source: Berk and DeMarzo, Corporate Finance 5th ed., Chapter 9; Damodaran, Investment Valuation 3rd ed., Chapter 12Last verified June 2026.

The four-corner rule

If the recommendation flips at the corners, disclose it

A two-way sensitivity table has four corners. If the buy or sell recommendation flips at one or more of those corners, the publication should say so explicitly in the body text. A target price that holds across the table is robust. A target price that fails at three corners and survives only the bullish corner is not a valuation, it is a hope.

Where to go next

Last verified June 2026. Source: Berk and DeMarzo Corporate Finance 5th ed.; Damodaran Investment Valuation 3rd ed.