Mid-year convention adjustments for final year discount number for multiples method vs. gordon growth?

I don't understand exactly why one would add 0.5 to the final year discount number for the multiples method, but would leave the gordon growth method's final year discount number as is..

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Comments (2)

Oct 29, 2015

The point of the mid-year convention is to show the assumption that a company's free cash flow is received evenly throughout the year. When using GGM you continue to use the mid-year convention because you are still discounting your perpetual free cash flow which you assume is coming in throughout the year.

In the multiples exit method you are not showing free cash flow throughout the year, you are showing an EV/EBITDA etc multiple, so it doesn't make sense to use a midyear convention. Make sense?

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Oct 29, 2015

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