DCF Mid-Year Convention and Stubs

How does the valuation date change discounting?

Use one synthetic 2026–2028 calendar-year DCF with annual FCFF 445, 467.50 and 510 in EUR thousands. WACC is 10%, perpetual growth 2%, and terminal value is 6,502.50 after 2028. FCFF Calculation supplies the operating assumptions; DCF Valuation Model owns the wider valuation. This exercise changes only timing controls.

Compare four explicitly defined timing states

Compare January 1, 2026 with year-end and mid-year conventions, then July 1, 2026 with each convention. First-year proration is enabled in all four states. For January, the first-year remaining fraction is 1. For July, 184 of 365 days remain: 184/365 = 0.504109589. The July first discounted cash flow is 445 × 184/365 = 224.33. Later annual cash flows remain 467.50 and 510.

Internally, annual periods end at the exclusive January 1 boundary of the next year: 2026 ends at 2027-01-01. The product’s ACT/ACT year fraction splits elapsed time by calendar year, including the relevant 365/366-day denominator. Calendar 2028 is a full year despite being a leap year. This is the implemented DCF convention, not a universal day-count choice.

DCF timing: follow the actual exponents and discount factors

For year-end, the exponent is the ACT/ACT time from valuation date to period end. Mid-year subtracts half of the full period’s year fraction multiplied by its remaining fraction. January exponents are therefore 1, 2, 3 or 0.5, 1.5, 2.5. July year-end exponents are 0.504109589, 1.504109589 and 2.504109589; July mid-year gives 0.252054795, 1.004109589 and 2.004109589.

The discount factor is 1.10 to the negative exponent. Present value is full-period FCFF × remaining fraction × discount factor for the prorated first year, and full FCFF × factor thereafter. The mid-year placement is the midpoint of the remaining interval for the first period, not a blanket subtraction of 0.5 from a stub’s end time.

Reconcile explicit cash flows and enterprise value

At the January date, changing only year-end to mid-year raises explicit FCFF present value from 1,174.08 to 1,231.39. The same annual cash flows arrive earlier under the convention. Terminal value remains discounted at time 3 under both conventions, so EV rises by exactly 57.31.

At the July date, year-end EV is 6,142.45 and mid-year EV 6,187.03. Both prorate the first cash flow identically and discount terminal value at time 2.504109589. Only explicit-flow timing changes between them. Comparing January with July also changes the remaining first cash flow and the measurement date; that comparison is not a pure convention change.

In every state, EV equals explicit-flow PV plus terminal-value PV. Terminal value stays at the terminal period end, including under mid-year. It is not advanced by half a year. The annual source FCFF forecast stays unchanged; a stub changes how much of its first period enters the discounted schedule.

Reproduce the timing controls

1. Download the synthetic DCF model file. Open the DCF model, then explicitly select Manage models → Import and choose the file. It contains the 2026–2028 calendar-year forecast in EUR thousands. The primary CTA opens the Value workspace without importing any example. A blank model may first show Activate; this file already has DCF active. In Model, switch to Advanced before editing, then return to Value.

2. Under Periods & cash flow settings keep first cash flow 2026, explicit forecast through 2028, terminal value after 2028, unlevered normalized EBIT tax and Prorate remaining first year on. Keep WACC override 10%, terminal growth 2%, anchor 2028 and terminal normalization off.

3. Set Discount date to 2026-01-01 and switch Timing convention between Year-end and Mid-year. Then set 2026-07-01 and repeat. Compare FCFF, discount factor and PV in the native cash-flow schedule with each table. The remaining fractions and exponents in these worked tables are calculation details from the same engine; the native schedule does not display them as separate rows. Check the EV reconciliation above. The native file starts at January year-end; select each timing state yourself.

DCF stub year: assumptions and limits

Proration assumes the remaining part of annual FCFF is proportional to calendar days; it does not infer seasonality or actual cash receipts. Turning first-year proration off uses the full first-period FCFF even for July. In the current implementation, mid-year placement still uses the remaining interval when that checkbox is off; it is not a generic full-year mid-point shortcut.

All included forecast periods must end after the valuation date. Review a different forecast range if the date crosses a period end. There is no bond-pricing or general date-driven valuation workflow implied here. For model calendar structure use Fiscal-Year Financial Model; for terminal construction use Terminal Value. After choosing timing, DCF Sensitivity Analysis tests WACC and terminal assumptions.