Sensitivity & 'Massaging the Numbers'
Change two defensible assumptions and Nike flips from 24% overvalued to 35% undervalued. The cautionary heart of DCF.
- ✓Build intuition for DCF sensitivity to WACC and growth
- ✓Read a sensitivity table
- ✓Understand the ethical edge of assumption-driven valuation
Here's the uncomfortable truth about DCFs. Suppose your boss can't tell Nike's executives the stock is 24% overvalued. Can the model be made to say something friendlier - without lying? Often, yes.
Two defensible changes
- Pull Nike's current levered beta straight from Bloomberg (instead of unlevering a comp set) - and apply a size premium for a company of Nike's scale.
- Assume Nike's current capital structure (~2.5% debt / 97.5% equity) is its long-term target.
Each is justifiable. Together they drop the from 8.9% to 6.7%, and from 8.3% to 6.6%.
| Base case | After 'massaging' | |
|---|---|---|
| 8.3% | 6.6% | |
| ~$104bn | ~$185bn | |
| of | ~$89bn | ~$169bn |
| Implied vs. market | ~24% downside | ~35% upside |
A 1.7% drop in WACC nearly doubled and flipped the conclusion from 'sell' to 'strong buy.' DCFs are powerful and dangerous: tinker with assumptions enough - even justifiable ones - and you can usually reach the 'answer' you wanted. Integrity lives in the assumptions, not the arithmetic.
This is why pros (1) present a range, not a point; (2) show a sensitivity table across and growth; and (3) cross-check against an implied exit multiple. The goal isn't one magic number - it's an honest, defensible range with the levers laid bare.
A DCF sensitivity grid puts on one axis and perpetual growth (or exit multiple) on the other, with implied share price in each cell. Scan it for how fast value changes per step - steep gradients tell you which assumption your conclusion really hinges on.
Reducing WACC from 8.3% to 6.6% roughly doubled Nike's enterprise value. The right conclusion is:
Implied share price across WACC (down) and perpetual growth (across). Watch how the corner nearest growth = WACC runs away - exactly why a small assumption change swings the valuation.
| WACC \\ g | 2.0% | 2.5% | 3.0% | 3.5% | 4.0% |
|---|---|---|---|---|---|
| 8.0% | $67.81 | $73.38 | $80.06 | $88.23 | $98.44 |
| 9.0% | $56.80 | $60.69 | $65.23 | $70.60 | $77.04 |
| 10.0% | $48.54 | $51.38 | $54.64 | $58.39 | $62.77 |
| 11.0% | $42.11 | $44.26 | $46.68 | $49.43 | $52.56 |
| 12.0% | $36.96 | $38.64 | $40.49 | $42.57 | $44.91 |