Series 79 practice questionmediumAdvanced Financial Analysis
When calculating terminal value in a DCF using the perpetuity growth method, which input is typically the most sensitive driver of the output?
- AProjected Capex
- BPerpetuity growth rate✓ Correct answer
- CDepreciation schedule
- DTax shield from interest
Explanation
Why B — Perpetuity growth rate
The perpetuity growth rate is a highly sensitive driver because small changes significantly impact terminal value. Less direct inputs like Capex or depreciation are not as influential in the perpetuity formula, so mistaking their importance can lead to large valuation errors.
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