What does sensitivity analysis help to show in a DCF?

Sensitivity analysis is a powerful tool used in discounted cash flow (DCF) analysis to understand how varying assumptions can impact the outcome of the model, particularly the valuation of the company. By adjusting key inputs, such as discount rates, growth rates, or margins, sensitivity analysis demonstrates how these changes influence financial projections and, ultimately, the estimated price per share.

Understanding this relationship is critical for investors, as it allows them to gauge the degree of risk associated with their investment, considering that small changes in assumptions can lead to significantly different valuations. This provides a clearer picture of the potential range of value for the company, helping stakeholders make informed decisions based on various scenarios.

In contrast, other options address aspects that are either not directly connected to DCF or relate to qualitative assessments rather than the specific numerical impact assessments performed through sensitivity analysis.