Mid-Year convention in DCF

ImPossible's picture
Rank: Baboon | 171

A quick stupid question guys.

Let's say there are 290 days left in 2009 and 2010, 2011, 2012, 2013 with terminal cash flows received at December 31, 2013.

If I were to use mid-year convention, could someone check with me if the following are the right ones to use?

0.4, 1.29, 2.29, 3.29, 4.29, 4.79

Thanks.

Comments (5)

Mar 17, 2009

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Mar 17, 2009

i meant using 4.79 for terminal year.

Mar 18, 2009

You are right....
Just for the Terminal Year, note the following: if you are estimating Terminal Value based on the growth-in-perpetuity method, then you should use the 4.29 to discount it back to PV (since you assume the business continues in perpetuity and therefore the cash flows continue to occur in the middle of each period).
However, if using the Exit Multiple method to estimate TV, you should discount it back using 4.79 (since you assume as if the business were being sold / valued at the very end of 2013).
Hope that helps!

    • 1
Mar 18, 2009

You are right....
Just for the Terminal Year, note the following: if you are estimating Terminal Value based on the growth-in-perpetuity method, then you should use the 4.29 to discount it back to PV (since you assume the business continues in perpetuity and therefore the cash flows continue to occur in the middle of each period).
However, if using the Exit Multiple method to estimate TV, you should discount it back using 4.79 (since you assume as if the business were being sold / valued at the very end of 2013).
Hope that helps!

Sep 27, 2010
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