The discount rate goes up by a point. What happens to the DCF, and which hurts more: that, or terminal growth falling by a point?

Say value falls either way and the higher discount rate usually hurts more, because WACC discounts every cash flow while growth only touches the terminal value. Prove it with a quick DCF, and note that growth drops out with an exit multiple.

Updated October 20, 2026

The numbers, step by step

Five years of $100 of free cash flow, a 10% WACC, 2% perpetuity growth, with the terminal value at the end of year five.

Forecast years at 10%$100 a year for 5 years at 10%

about $379

Terminal value at year five$100 × 1.02 ÷ (10% − 2%)

$1,275

Enterprise value today$379 + $1,275 ÷ 1.1^5

about $1,171

Enterprise value at an 11% WACC$370 + $1,133 ÷ 1.11^5

about $1,042

Enterprise value at 1% growth$379 + $1,122 ÷ 1.1^5

about $1,076

Loss from the higher WACC$1,171 − $1,042

about $129

Loss from the lower growth$1,171 − $1,076

about $95

What the interviewer listens for

• Do you say value falls and that WACC usually hurts more?
• Do you explain that WACC hits every cash flow and growth only the terminal value?
• Can you show it with numbers?
• Do you know the role of the spread and the exit multiple case?

Common mistakes

• Saying they are always equal because both widen the spread by a point.That holds only for a pure perpetuity with no forecast years.
• Forgetting that WACC also discounts the forecast cash flows and the terminal value back to today.
• Ignoring that growth doesn't appear at all when the terminal value uses an exit multiple.
• Getting the direction wrong and saying a higher discount rate raises value.

Likely follow-ups

• In a pure perpetuity with next year's cash flow at $100, which is bigger?They're the same. $100 over 11% minus 2% and $100 over 10% minus 1% both come to about $1,111.
• Why does a narrow spread make the DCF so sensitive?The terminal value is cash flow divided by the spread. Halving the spread from 4% to 2% doubles the terminal value.

More finance technicals

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• What multiples would you use for a bank, a REIT, an oil producer and a software company?
• How does valuing a private company differ from valuing a public one?
• What is a control premium, and how big is it usually?

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