Question

Rank the assumptions (drivers) according to sensitivity from lowest to highest.

1. Revid COGS +/-5%
2. Discount rate +/-5%
3. EV/EBITDA Exit +/-5%
4. Revenue growth +/-5%

Answer 1

To rank the sensitivity of financial drivers, one must account for how changes in each aspect influence overall valuation. Generally, revenue growth is most sensitive, followed by the discount rate, EV/EBITDA exit multiples, and lastly cost of goods sold (COGS).

Step-by-step explanation:

The question requires ranking various financial drivers in a sensitivity analysis from the lowest to highest sensitivity. This entails understanding how changes in these drivers can affect the valuation of a company. When examining the sensitivity of various assumptions, we need to consider the degree of impact a change in the assumption has on the end value.

To rank the given drivers according to sensitivity, we typically rely on the influence they have on the overall financial model outputs. The following ranking is provided based on the common impact each driver has, generally speaking:

1. Revenue growth +/-5%: Changes in revenue growth are often the most sensitive as revenue is the starting point for all other calculations, which means any change can have a compounding effect.
2. Discount rate +/-5%: The discount rate has a significant impact on present value calculations; altering it can meaningfully change the valuation.
3. EV/EBITDA Exit +/-5%: The exit multiple will influence the terminal value calculation in a discounted cash flow model but often follows revenue growth and discount rate in sensitivity.
4. Revised COGS +/-5%: While important, cost of goods sold tends to have a lower sensitivity compared to revenue changes since it does not influence other financial drivers directly.

Answer 2

To rank the financial assumptions from lowest to highest sensitivity, one should consider how each factor affects the valuation model. Revenue growth is typically the most sensitive, followed by COGS, EV/EBITDA Exit multiplier, and the Discount rate.

Step-by-step explanation:

When considering the sensitivity of various assumptions in a financial model, analysts usually focus on which variables have the highest potential to change the outcome of the model significantly.

To rank the assumptions (drivers) from lowest to highest in terms of sensitivity, think about how each driver affects the overall valuation and how fluctuation in that assumption can magnify changes in the output.

1. Revenue growth +/-5%: Variability in revenue growth has a compounding effect over time, making it highly sensitive as it impacts the future revenue streams greatly.
2. Revised COGS (Cost of Goods Sold) +/-5%: While important, variations in COGS will generally have a somewhat less pronounced effect compared to revenue growth due to its impact being on the cost side rather than revenue.
3. EV/EBITDA Exit +/-5%: The exit multiple determines the final valuation in an exit scenario. A 5% change can be significant, especially if it's compounded by other growth metrics, but its impact will be isolated to the terminal value.
4. Discount rate +/-5%: Changes in the discount rate affect the present value of all future cash flows. A small change in the discount rate can significantly alter the valuation as it affects the risk assessment and time value of money for all periods.

Therefore, in ranking these drivers from lowest to highest sensitivity, the order would be: Revised COGS, EV/EBITDA Exit, Revenue growth, and Discount rate. It's important to note that the specific context of the company and scenario could affect this ranking.