I understand for mid-year convention in a DCF, you would use 0.5 for year 1, 1.5 for year 2, etc. (Cash flow is in the middle of the year, instead of at the end of the year)
But what does it mean for there to be a "stub period"?
i.e. if the stub period is Q4 of year 1 - what does this mean? And how would you calculate discount periods with stub?
Stub Period DCF
Below is an explanation for valuation in a stub stub period. You can also find an example of a mid year DCF lbo/stub"> here.
Calculation is pretty straight forward. For the stub period, you adjust the cash flow and assume that it is received during the middle of the stub period. For all full future periods, cash is assumed to flow during the middle of the fiscal period. This must be adjusted based on the valuation date of your DCF.
All examples assume a 30/360 days convention for simplicity.
Ex.1: Valuation date of 12/30/13; 12/30/13 FYE w/o mid-year convention
FY2014 - Discount period = 1.000
FY2015 - Discount period = 2.000
FY2016 - Discount period = 3.000
Ex.2: Valuation date of 12/30/13; 12/30/13 FYE w/ mid-year convention
FY2014 - Discount period = 0.500
FY2015 - Discount period = 1.500
FY2016 - Discount period = 2.500
Ex.3: Valuation date of 9/30/13; 12/30/13 FYE w/ mid-year convention (Q4 = stub)
FY2013 (Q4) - Discount period = (0.000 + 0.250) / 2 = 0.125
FY2014 - Discount period = (1.000 + 0.250) - 0.500 = 0.750
FY2015 - Discount Period = (2.000 + 0.250) - 0.500 = 1.750
In terms of excel, you can typically use the following, with "midyear" serving as a mid-year convention toggle:
"=IF(midyear, MAX(YEARFRAC(start date, period date,1)-0.5, YEARFRAC(start date, period date,1)/2), YEARFRAC(start date, period date,1)"
Should help answer your question.
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