Series 79 practice questionmediumDCF Analysis
When using the mid-year convention in a DCF, what is the primary purpose?
- ATo match fiscal year-end reporting
- BTo align with tax payment schedules
- CTo reflect seasonality in revenue
- DRecognize that cash flows occur throughout the year rather than year-end✓ Correct answer
Explanation
Why D — Recognize that cash flows occur throughout the year rather than year-end
The mid-year convention reflects cash flows being received throughout the year rather than solely at year-end. Relative to a year-end convention, it shortens the discount period and therefore increases present value; ignoring it and assuming year-end receipt generally understates present value.
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