Series 79 practice questioneasyDCF Analysis
In a DCF model using the mid-year convention, what is the primary effect on the present value of free cash flows?
- AIt increases the discount rate applied to each year
- BIt increases the total enterprise value, all else equal✓ Correct answer
- CIt decreases the terminal value multiple
- DIt delays the forecast period by six months
Explanation
Why B — It increases the total enterprise value, all else equal
Using the mid-year convention increases the present value of projected cash flows because it assumes cash is received evenly throughout the year. Not applying this convention can understate value, especially for high-growth companies.
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