01Why it moves so much
A discounted cash flow has two halves. The first is the cash flows you project one by one: ten years, typically. The second is the terminal value: everything the company earns from year eleven to the end of time, condensed into a formula with two variables.
That formula is a division whose denominator is the discount rate minus the perpetual growth rate. At 9% and 2%, you divide by 0.07; drop the WACC half a point and you divide by 0.065. That tiny change in the denominator is the bulk of the effect: lowering the WACC also raises the present value of the ten projected flows, and of the terminal value when discounted back, but those weigh far less.
And the effect is not fixed: the closer the two numbers are, the more brutal it gets. Measured on the calculator, dropping the WACC by half a point:
- WACC 9% → 8.5%, with g = 2%: €41.60 → €45.47, +9.3%.
- WACC 9% → 8.5%, with g = 3%: €46.33 → €51.26, +10.6%.
- WACC 7% → 6.5%, with g = 3%: €73.58 → €85.31, +15.9%.
Move the assumptions yourself in the DCF calculator →
02The number that matters more than the price
The same half point is worth 9% or 16% depending on where you are standing. Which is why the weight of the terminal value matters as much as the price itself: if it says 85%, your valuation is not talking about the company you know; it is talking about the year 2040.
03What to do about it
- A number is not a valuation; a range is. That is why Celsmar computes the DCF across three scenarios and shows all three, not the middle one.
- Distrust price targets with no assumptions attached. If you cannot see the discount rate and the perpetual growth rate, you are looking at the result of a division you cannot check.
- Perpetual growth has a real ceiling. No company grows forever faster than the economy it operates in, which is why the control on the calculator stops at 4%.
The calculator is a deliberate simplification for teaching: it projects constant growth for ten years, does not model tax, capital expenditure or working capital, and uses a single rate throughout. It is there to show the shape of the sensitivity, not to value a real company.
Frequently asked questions
How much does the WACC affect a DCF valuation?
A great deal, and unevenly. Dropping the discount rate by half a point moves the value per share by between 9% and 16% depending on the perpetual growth assumption: at 9%→8.5% with g=2% the value rises 9.3%, and at 7%→6.5% with g=3% it rises 15.9%. The closer the discount rate and the growth rate are, the larger the effect, because the terminal value formula divides by the difference between them.
Why is terminal value such a large part of a DCF?
Because it captures everything from year eleven to infinity, against the ten years you project explicitly. In a typical case it is 70% to 80% of the total. If it exceeds about 75%, the valuation is measuring your assumptions about the distant future rather than the business you can analyse, which is worth knowing before presenting the output as a price target.
Is a DCF reliable for valuing a stock?
As a model, yes; as a prediction, no. It is correct arithmetic applied to uncertain assumptions, and the result inherits that uncertainty. Used to produce one exact figure it misleads. Used to see which assumptions a valuation is sensitive to, and what would have to be true to justify today's price, it is genuinely useful. That is why a range across scenarios informs more than any single number.
What perpetual growth rate should I use in a DCF?
Something below the long-run growth of the economy the company operates in, because no business grows faster than its economy forever. In practice that puts a ceiling of a few percent. The temptation is to raise it, which works spectacularly on the spreadsheet precisely because the terminal value divides by the discount rate minus growth, and that is exactly why the assumption deserves more scrutiny than the output.
The figures quoted come from the DCF calculator on this site, which projects constant growth for ten years and uses a single discount rate. It is a teaching simplification and does not model tax, capital expenditure or working capital.
This is information and analysis, not financial advice, and it contains no recommendation to buy or sell. See the disclaimer.
