Sensitivity and scenario analysis
A single number is a guess. A range you can defend is an answer.
Every valuation is a set of assumptions with arithmetic attached, and the arithmetic is the easy part. Sensitivity analysis asks how much the answer moves when one assumption changes; scenario analysis asks what happens when several change together, in the way they actually would. The purpose is not decoration on the last page of a deck. It is to find out which two or three inputs are carrying the valuation, so that the discussion happens about those rather than about the third decimal place of a year-four margin. A model that produces one number invites an argument about whether that number is right. A model that produces a range, and can say precisely what drives it, changes the conversation into one about assumptions, which is the only conversation worth having.
What this course covers
- 01Lock the base case first
- 02Rank the inputs before flexing them
- 03Choose ranges that are plausible, not symmetric
- 04Build the two-way grid on the two that matter
- 05Write scenarios that hang together
- 06Report a range and name what drives it
What you will be able to do
- Presenting any DCF, where terminal assumptions dominate the result
- Identifying which inputs deserve real research and which do not matter
- Underwriting a transaction, where the downside case decides the structure
- Stress-testing covenant headroom in a leveraged deal
Where it does not apply
- As a substitute for getting the base case right: a range around a wrong centre is still wrong
- Flexing every input at once, which produces noise rather than insight
- Presenting a range so wide it contains every possible conclusion and therefore recommends nothing
Predict it first
Not markedTwo assumptions are revised at once, in opposite directions: the discount rate rises, and so does terminal growth. Each on its own moves the valuation the way you would expect.
ChangeBeta 1.10 → 1.35, and terminal growth 2.25% → 3.00%
How this prepares you for the assessment
This is one of 17 courses, and none of them is required for the Verified Valuation Assessment. The credential is earned on two timed drills, graded by the same engine that checks this course, and the drill score decides what it says you are capable of, from Foundation through to Distinction.
- Distinction90%+Works independently across all three core methods.
- Merit75%+Builds the core models with limited supervision.
- Pass60%+Understands the mechanics; works through a model with guidance.
- FoundationcompletedKnows the vocabulary and the shape of each model.