Stub period is Q4 '08.
So my discount periods are as follows:
(half of .25) Period1+6mos Period2+1yr Period3+1yr
.13 .63 1.63 2.63 and so on...
My period is 4.63.... My terminal value is 5, correct?
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COrrection: Terminal period is 5, correct?
Nope... when you have stub period and mid-year convention, the accurate way to account for these is:
Mid-year ==> 0.13 0.75 1.75 2.75 3.75
Which means you cannot add 0.5 on the first 0.13 period... Hope it helps!
and Terminal Value by 4.25...
TV will depend on whether you're using an exit multiple or a perp rate. Multiples are usually assumed to be based on Full Yr. EBITDA, so you'd use 5.0 as your terminal. Lui has it right, 4.25 for perp growth.
No, I disagree. Even when using the exit multiple approach you would use the 4.25 to present value TV, as the exit multiple assumes the value of the company as if it was sold on the end of the terminal year (independently of full or mid-year discounting - and in this case the terminal year is 4 plus the stub 0.25). If you discount it by 5, you are assuming you do not have a stub period, which is not true. Discounting by 4.25 you are bringing the cash flow to the present (very basic "The time value of money" class). But if you were to use the perpetuity grwoth method, then you would use the same number used to discount the last year's FCF (which in this case using the mid-year convention is 3.75).
I saw your posting when I was looking for information regarding stub year factor. I am currently valuing a business per March 31, 2009 by taking into the DCF 9 months of 2009, FY 2010, FY 2011, FY 2012, FY 2013 and first quarter of 2014. If I use the mid-year convention, i.e. assuming that the cash flows will be generated in the middle of each period wouldn't I have to use a factor of 0.5 for 2009 rather than 0.375 as suggested by your calculation (I assume that all cash flows will be generated exactly in the middle of the 9-months period)? For the next years (assuming cash flows in mid-year 2010, 2011 etc.) I would then use a factor of 1.4 (21 months left to year end 2010; cash flows to be generated after 15th months, so 21/15=1.4). Does this make sense or am I making a mistake somewhere?
I don't understand why you have the first quarter of 2014 as a projection period. I would simply do FY2009 (9mths), FY 2010, FY2011, FY2012, FY2013 and assuming the mid-year discounting it would be:
FY 2009 2010 2011 2012 2013 Projection Year ---> 0.75 1.75 2.75 3.75 4.75 Mid-Year conv. ---> 0.38 1.25 2.25 3.25 4.25
Obviously, for FY2009 you would only be discounting the 9 months forecast figures.
So, when discounting each year's cash flow, you would use this "Mid-Year conv." line as your "n" in the WACC formula. With that, you are adjusting for stub and mid-year convention.
Note that, if using Exit Multiple method to estimate TV, use 4.75 to discount it to PV.
If using growth-in-perpetuity method to calculate TV, use 4.25 to present value TV.
lui has it right I believe
Can you please explain how you are getting to the amounts in the mid-year convention? I agree with the 0.38 but would have thought you simply add 1 every year post-2009 for the relevant discount factor.
This is tricky...
Basically the rule is: 1. Put the stub as your first "year" and add 1 for the subsequent years (as I did in "Projection Year" above) 2a. For Mid-year, the rule is is to subtract 0.5 from each "Projection Year" figure, however, since we have a stub-year, for the first column you do: "Projection Year"/2 2b. And from FY2009, you do: "Projection Year"-0.5, and do not simply sum 1 to the 0.38 you've just obtained.
The tricky part on that is that you cannot sum 1 after you calculate the first mid-year (stub), because then it would be 1.38, which is wrong. The best way to undertand that is to draw a timeline in a blank sheet of paper and simulate the stub and mid-year.
Hope that helps!
Its funny how much more often we use multiples these days than DCF, but I think the above is right
EVERYBODY WHO COMES TO THIS THREAD -- LUI IS CORRECT -- however allow me to clarify further
Firstly, lets get the stub business out of the way.... I will give a plentiful of examples
If we are examining at Q2: there are "270" days left (assuming out of 360) ---> 270/360 = .75 If we are examining at Q3: there are "180" days left (assuming out of 360) ---> 180/360 = .5 If we are examining at Q4: there are "90" days left (assuming out of 360) ---> 90/360 = .25
Lets make this MORE complicated
If we are examining at November 1st: there are "60" days left (assuming out of 360) ---> 60/360 = .16 If we are examining at February 1st: there are "330" days left (assuming out of 360) ---> 330/360 = .91
ESSENTIALLY, start off by assuming 30 days/month and 360 days/year
NOW DOWN TO BUSINESS
Let's use a complex example for calculating MYC from one of the above calculations
EX: February 1st -- at this moment in time there are "330" days left and therefore 330/360 = 0.91
Projection Year
Y1: 0.91 Y2: 0.91 + 1 = 1.91 Y3: 1.91 + 1 = 2.91 Y4: 2.91 + 1 = 3.91 Y5: 3.91 + 1 = 4.91
Mid Year Convention
Y1: 0.91/2 = .455 Y2: 1.91 - 0.5 = 1.41 Y3: 2.91 - 0.5 = 2.41 Y4: 3.91 - 0.5 = 3.41 Y5: 4.91 - 0.5 = 4.41
NOW -- we must determine whether or not we are using the perpetuity growth method OR the exit multiples method
EXIT MULTIPLES METHOD: Estimate PV using Y5 4.41 PLUS 0.5 = (4.41 + 0.5) = 4.91
PERPETUITY GROWTH METHOD: Estimate PV as a perpetuity (so you DO NOT adjust by .5 to arrive at the end of Y5) and instead just use 4.41
--> PS: I am a new Summer Analyst and therefore my calculations and response is suspect to error -- please tread lightly -- I would appreciate any corrections so as to distinguish false information
Best
I'm sure your help reached the right people.
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