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elan's picture

Quick (stupid) DCF question

by elan Certified User (Senior Orangutan, 388 Banana Points Points) on 8/21/08 at 9:53pm

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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elan's picture

COrrection: Terminal period

by elan Certified User(Senior Orangutan, 388 Banana Points Points) on 8/21/08 at 9:53pm

COrrection: Terminal period is 5, correct?

lui's picture

Nope... when you have stub

by lui (Senior Chimp, 21 Banana Points Points) on 8/21/08 at 11:27pm

Nope... when you have stub period and mid-year convention, the accurate way to account for these is:

0.25 1.25 2.25 3.25 4.25
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!

lui's picture

and Terminal Value by

by lui (Senior Chimp, 21 Banana Points Points) on 8/22/08 at 12:55am

and Terminal Value by 4.25...

angry_keebler's picture

TV will depend on whether

by angry_keebler (Senior Monkey, 81 Banana Points Points) on 8/22/08 at 2:37am

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.

lui's picture

No, I disagree. Even when

by lui (Senior Chimp, 21 Banana Points Points) on 8/22/08 at 9:16am

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).