Mid-year convention in DCF

CFA General
#1

Hi,

I’m valuing a company and a project;

A - Company - valuation date is 10/22/2012 ; assuming going concern and terminal value

B - Project -valuation is 10/22/2012 with termination date 3/31/2024

I’m having issues with conceptualizing the mid year convention adjustments and would like your help. I have computed the mid year periods as follows:

A)

YR: 2012 - .095890

YR: 2013 - 1.00

YR: 2024 - 11.7

B)

YR: 2012 - .095890

YR: 2013 - 1.00

YR: 2024 - 11.4 (as projects terminal date is 3/31/24)

Is this ok?

#2

I didn’t check your numbers but your explanation suggests B is more correct than A

#3

Both should be correct, it’s just that (A) is a business running forever and (B) is a project.

“should be” according to me but im not 100% sure.

#4

Midperiod for 2012 is 11/25/12, so periods to discount would be 0.0929 [yearfrac(11/25/12,10/22/12,1)].

Midperiod of 2013 is 6/30/13, so periods to discount would be 0.6877 [yearfrac(6/30/13,10/22/12,1)].

#5

Thanks guys!