Which best describes the purpose of sensitivity analysis in a valuation model?

• A. To calibrate the model's formatting and layout
• B. To assess the regulatory compliance of the model
• C. To determine the exact market price of the stock today
• D. To identify the main drivers of value and see how results change with key inputs

Answer: (D)

Sensitivity analysis in a valuation model examines how changes in key inputs affect the results. By adjusting assumptions like revenue growth, margins, discount rates, or terminal value, you can see which factors move the estimated value the most and how robust the valuation is to different inputs. This helps identify the main value drivers, prioritize data collection, and understand risk—so you can gauge potential value under various scenarios.

It isn’t about formatting the model, checking regulatory compliance, or pinpointing today’s exact market price. Those tasks are separate from evaluating how inputs shape outcomes. The key takeaway is understanding which inputs drive value and how sensitive the results are to changes in those inputs.