Explain how sensitivity analysis is used in FCFF and FCFE valuation

A free cash flow valuation depends on many inputs: sales growth, margins, investment rates, the discount rate and the long-run growth rate. Sensitivity analysis changes one input at a time, holding the others at their base values, to see how far the estimate moves. Inputs that move value most deserve the most research. Usually the required return and the long-term growth rate matter most, because they drive the terminal value, which is often most of the total, and value depends on the gap between them. Analysts may also vary two inputs together in a grid. The trap is presenting a single point estimate as precise when a plausible change in one input shifts value by a large fraction.