Corporate Finance tutoring by finance professionals with MBAs, CFA or PhDs

What variables would you do a sensitivity analysis on when valuing a company using the DCF method?

Every valuation model is based on a variety of assumptions about the future. And assumptions about the future by nature are uncertain. How will you account for the fact? How will you account for this uncertainty? You will account for this uncertainty by doing a sensitivity analysis. Sensitivity analysis is the process how evaluating how sensitive your valuation is for changes in assumptions.

Since the DCF valuation model relies on a large number of assumptions, which are the ones you will focus on? Using Crystal Ball or @Risk or a similar software enables you to do sensitivity analysis on many variables at a time. How do you pick the top four – if you are using a data table approach to sensitivity analysis?

This page answers the question: What variables would you do a sensitivity analysis on when valuing a company using the DCF method?

Could a company with high growth rates have low valuations? Why?

Most people may agree with this statement and believe higher growth is always good. However, this is not always true! Are higher revenue growth rates always good – as in does higher revenue growth always lead to higher valuation?

This page addresses if a company with high growth rates have low valuations and why?

Are higher revenue growth rates always good (leading to higher valuation)?

Most people may agree with this statement and believe higher growth is always good. However, this is not always true! Are higher revenue growth rates always good- as in does higher revenue growth always lead to higher valuation?

What are excess returns? What drives excess returns?

Excess returns can be viewed in many ways. In a DCF valuation context, excess returns are returns above the cost of capital. This article explores when a firm can earn excess returns. This page also discusses the conditions required to maintain excess returns?

Why is this important in your DCF context? This is important in a DCF context as you have to make assumptions about growth and returns in your valuation model.

How does the reinvestment rate impact the value of a business in DCF valuation when the business is profitable?

The reinvestment rate measures how much a firm is plowing back to generate future growth. So clearly the reinvestment rate matters for growth. How does the reinvestment rate correlate with growth and therefore with the value of a business? We explore how the reinvestment rate impacts the value of a business in DCF valuation in this article.

How does the reinvestment rate impact the value of a business in DCF valuation?

When are the sustainable growth rates and operating income growth rates equal?

We know that When are the sustainable growth rates and operating income growth rates are NOT always equal. There are specific conditions when are the sustainable growth rates and operating income growth rates can be equal.

This webpage discusses when are the sustainable growth rates and operating income growth rates will be equal.

Can use the sustainable growth rate equation to grow revenues? If not, how do you estimate revenue growth rates?

Sustainable growth is the growth a company can grow at given its profitability and reinvestment decisions without taking on additional debt. The equation for sustainable growth = Retention ratio* Return on Equity. And since the retention ratio is equal to 1- Payout ratio, sustainable growth is also = (1- Payout ratio) * Return on Equity. We understand what the sustainable growth rate is and its formula.

Can I use the sustainable growth rate as my company’s revenue growth rate in the DCF valuation model?

Can you use the sustainable growth rate equation to grow operating income? If yes, what is the formula? If not, how do you estimate operating income growth rates?

Sustainable growth is the growth a company can grow at given its profitability and reinvestment decisions without taking on additional debt. The equation for sustainable growth = Retention ratio* Return on Equity. And since the retention ratio is equal to 1- Payout ratio, sustainable growth is also = (1- Payout ratio) * Return on Equity. We understand what the sustainable growth rate is and its formula. Can I use the sustainable growth rate as my company’s operating income growth rate in the DCF valuation model?

If not, how do you estimate operating income growth rates?

Will a company grow at the sustainable growth rate? Is that the growth rate I should use in my DCF valuation?

Sustainable growth is the growth a company can grow at given its profitability and reinvestment decisions without taking on additional debt. The equation for sustainable growth = Retention ratio* Return on Equity. And since the retention ratio is equal to 1- Payout ratio, sustainable growth is also = (1- Payout ratio) * Return on Equity.

We may understand what the sustainable growth rate is and its formula.

The question we address on this page is if a company can grow at the sustainable growth rate? Is that the growth rate you should use in my DCF valuation?

How does the equation of sustainable growth rate feature in a DCF valuation?

Sustainable growth is the growth a company can grow at given its profitability and reinvestment decisions without taking on additional debt. The equation for sustainable growth = Retention ratio* Return on Equity. And since the retention ratio is equal to 1- Payout ratio, sustainable growth is also = (1- Payout ratio) * Return on Equity.

We may understand what the sustainable growth rate is and its formula. The question we address on this page is how does the equation of sustainable growth rate feature in a DCF valuation?

Finance Tutoring with CPA, CFA PhD & MBA Tutors