What happens to TEV when using mid-year discounting?
So I tried playing around with a DCF I built and noticed that overall TEV goes down when using mid-year discounting, which makes sense because of time value of money, but I noticed overall TEV coming from terminal value goes is lower using mid-year discounting.
Have trouble getting my head around why this is. Is it because the PV of cashflows has more weighting because of time value of money as well?
Also is there any difference between the exit multiple method and gordon growth method? There doesn't seem to be any in my model - they both go down by the same proportion.
Deleted (fd up answer misunderstood question)
If we’re using the same definition of mid year discounting, which means you adjust all projection-period cash flow discounting periods down by 0.5 (so you discount year one cash flows by (1+r)^0.5, year two by (1+r)^1.5), then TEV goes up. This is the standard definition so I’m not sure why your TEV is going down.
In regards to terminal value, changing to mid-year or not does not affect terminal value, as we assume the terminal portion of the value still begins as a year-end cash flow, unlike the projection period cash flows where we apply mid-year discounting to account for the fact that a business receives cash equally throughout the year (this methodology would be inaccurate if we were dealing with a seasonal company)
For gordon growth vs multiple, this just depends on what assumptions you make. Using an exit multiple implies a certain perpetuity growth rate, and using a growth rate implies a multiple. If your multiple assumption perfectly equates your growth assumption in implied growth rate then yes the terminal value should be the same.
Thanks - I'm an idiot, meant the overall value goes up during mid-year but weighting on terminal value as a % of total EV decreases but by around 0.2%..
Reason i asked this questions is because I've heard of people getting getting asked how mid-year affects terminal values and multiples in interviews and there's quite a negligible change between terminal value weighting between the two methods, so I'm not sure why this gets asked other than to throw people off? Question doesn't really make much sense to me.
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