medium · Principles of Finance time-value-of-money
What is the purpose of the 'Mid-Year Convention' in a Discounted Cash Flow (DCF) model?
- To better reflect that cash flows are received continuously throughout the year rather than in one lump sum at year-end.
- To simplify the arithmetic by using half-year increments.
- To account for the seasonal nature of retail sales which peak in December.
- To align the valuation with the mid-point of the firm's fiscal year for tax purposes.
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