Mid-Year Convention
Investment Banking glossary · Investment Banking Valuation
Definition
DCF discounting convention that assumes cash flows arrive at the midpoint of each year rather than year-end, using exponents of 0.5, 1.5, 2.5, ldots instead of 1, 2, 3, ldots: PV = fracUFCF_t(1+WACC)^t-0.5. Produces a higher enterprise value than end-of-year discounting (typically 3-5% over a 5-year projection). More technically accurate for businesses with steady, evenly distributed cash flows; less appropriate for seasonal businesses. The PGM terminal value should also be discounted using mid-year convention; using year-end understates value.
Mid-Year Convention in plain English
When you value a company, future cash is worth less than cash today, so you "discount" each future year's cash back to a present value. The normal shortcut assumes all of a year's cash lands on December 31 — but in reality a business earns money all year long, roughly averaging out to the middle of the year. Mid-Year Convention fixes that by pretending the cash arrives at each year's midpoint (using time-exponents of 0.5, 1.5, 2.5 instead of 1, 2, 3), so you discount it over slightly less time. Because you're waiting a bit less, the cash is worth a bit more — this usually lifts the company's value by about 3 to 5%. It's the more honest choice for steady, year-round businesses, but less fitting for seasonal ones (like a ski resort) where cash clumps into a few months.
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