skills/dcf-model-builder/references/sensitivity-and-scenarios.md

# Sensitivities and Scenarios

Required scenarios: downside, base, upside. Each should have a business narrative plus numeric assumptions.

Required sensitivities: WACC/terminal growth, WACC/exit multiple, and revenue-growth/EBIT-margin. Include negative, zero, and positive cases.

If scenario cases change operating drivers, WACC, and terminal assumptions together, label the displayed range as a composite scenario range. Present focused sensitivities separately so the reader can distinguish business-performance exposure from valuation-framework exposure and equity-bridge exposure.

Use the same scenario order throughout the workbook and cover note, ordinarily `Downside`, `Base`, `Upside`. When quoting a sensitivity value or range, label whether it is a base-centered control range or the full displayed sensitivity spread.

Pressure tests:
- Directionality: higher WACC should lower value; higher growth, margins, or multiple should raise value.
- Scenario switch: downside should not exceed base without a clear explanation.
- Terminal concentration: flag high TV percent of EV prominently in the first-read view and explain its implication.
- Reverse DCF: for public-company pitch work with a current share price or transaction reference, show a controlled numeric solution when a material valuation divergence exists or it otherwise materially informs the recommendation. Solve for one operating assumption while holding base WACC and terminal growth constant, or solve for WACC or terminal growth while holding base operating assumptions constant; do not describe a composite scenario as market-implied expectations.
- Bridge sensitivity: where leases, diluted shares, debt-like items, or non-operating assets are material or unsettled, show their value-per-share impact.
- Survivability: in downside, address liquidity, covenant, and cash conversion pressure when relevant.

Present sensitivities as ranges with key drivers and caveats, not as precise targets.