![]() Notably, the discount periods for the mid-period convention is always 0.5 years lower than the discount periods for the end-of-period convention.ĭiscounting the Terminal Value: Perpetuity See Figure 1 for a comparison of mid-period and end-of-period discounting periods for the five-year discrete projection period. Each subsequent year’s free cash flow is discounted back by an additional year (e.g., year two’s free cash flow is discounted back by 2.0 years). Year one (2018) free cash flow is discounted back by 1.0 year because the first-year free cash flow is received 1.0 year (on December 31, 2018) after the Januvaluation date. The free cash flow is assumed to occur at the end of the year (on December 31) when the end-of-period discount convention is used. Each subsequent year’s free cash flow is discounted back by an additional year (e.g., year two’s free cash flow is discounted back by 1.5 years). Year one (2018) free cash flow is discounted back by 0.5 year because the first-year free cash flow is effectively received 0.5 year (on June 30, 2018) after the Januvaluation date. The free cash flow is assumed to occur in the middle of the year (on June 30 for a calendar-based company) when the mid-period discount convention is used. To demonstrate this concept, we will use an example with a Januvaluation date and a five-year discrete projection period. Nobody disputes how to discount the discrete projection period. It is for this reason that I decided to write an article that explains the issue.ĭiscounting the Discrete Projection Period So why write an article about something that is not debatable? As a practitioner who focuses on valuation-related disputes, I sometimes must address a report written by another practitioner who uses the “incorrect” discount period. ![]() One example is the discount period used to convert an undiscounted terminal value as of a future date into its present value as of the valuation date. The “correct” answer is obtainable because the debate is over facts, not judgments. ![]() However, some valuation disputes are not worth debating. Moreover, it is often difficult to definitively prove which practitioner made the “correct” judgment-based determination. Two valuation practitioners frequently arrive at very different views when looking at the same information. Valuation disputes often resemble political disputes. This article explains why the undiscounted terminal value as of a future date must be discounted back by (a) N – 0.5 years when the traditional perpetuity method with a mid-period convention is used, (b) N years when the traditional perpetuity method with an end-of-period convention is used, or (c) N years when an exit multiple is used. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |