Discounting mid-year versus end-of-year conventions: A company's financial model uses a discount rate to assess the present value of its future cash flows. I...
A company's financial model uses a discount rate to assess the present value of its future cash flows. If the discount rate is higher, the present value will be lower, meaning the company would have less money available to invest in the future.
Mid-year conventions:
Are typically set closer to the end of the year than end-of-year conventions.
Reflect the company's financial situation as of the middle of the year.
If the company has recently received a large dividend or received a loan repayment, this could be reflected in the discount rate.
End-of-year conventions:
Are set closer to the end of the financial year.
Reflect the company's financial situation as of the end of the year.
If the company has received a dividend or received a loan repayment in the final quarter, this could be reflected in the discount rate.
Discounting mid-year versus end-of-year conventions is important to ensure that the financial model reflects the company's financial position accurately at the time of valuation