What happens to the DCF value if you increase WACC by 1%?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Value decreases – significantly. Higher WACC means future cash flows are worth less today. For a typical company, a 1% WACC increase can reduce EV by 15–25%. The exact impact depends on the proportion of value in the terminal period. This is why sensitivity analysis is essential.
WHAT INTERVIEWERS LISTEN FOR
- ✓Value decreases significantly
- ✓Higher WACC reduces present value
- ✓1% increase reduces EV 15-25%
- ✓Impact depends on terminal value
- ✓Sensitivity analysis is essential
COMMON MISTAKES
- ✗Saying value increases
- ✗Ignoring terminal value impact
- ✗Claiming exact impact is fixed
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