question about mid year convention
Hello Monkeys,
I'm a little bit confused about the concept of mid year convention. Rosenbaum's guide says that PV1=FCF1/(1+r)^0.5, PV2=FCF2/(1+r)^1.5 ........ PV t=EBITDA*EM/(1+r)^5
however, that's assuming that the valuation date is at the beginning of projection year 1.
What if, let's say, the valuation date is 6/30 in the year ended 12/31/14?
One book states that, in this situation, the proper calculation is:
PV1=(FCF1*6/12)/(1+r)^3/12
PV2=FCF2/(1+r)^1
PV3=FCF3/(1+r)^2
...(as shown in the pic)
now that got me confused...
what is the proper way to calculate PV when you're doing the valuation in the middle of a year? Thanks
yeah that sounds right to me. You only want to include forward looking cash flow, so it's basically telling you to weight the current year CF by 0.5 (for the six months remaining), and then discount using the midyear convention by one quarter. E.g. midpoint of the cash flow for 2H 2014 would be September. Every year beyond that, the midpoint is still in June, so you are now discounting by integer years.
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