Mid-Year Convention
Short definition
The mid-year convention pulls the discount exponent half a year forward by treating annual cash as arriving at mid-year, not year-end. If cash accrues evenly, year-end discounting understates value.
Detailed explanation
Seasonal cash (agriculture, tourism, retail) can put mid-year in the wrong place; a quarterly model is more honest. Terminal value must follow the same timing rule; year-end TV with mid-year explicit years is a level shift.
At a high r the PV effect of half a year grows. In Turkey a high WACC makes this choice more than cosmetic.
Why it matters for the CFO
On the same FCFF and WACC, year-end versus mid-year moves EV by several points. In a listing report the method sentence is as argued as the multiple.
How it is calculated
PV = Σ CF_t / (1 + r)^(t − 0,5) (yıl sonu yerine yıl ortası)
Variables in the formula
- t: Year index (1, 2, …)
- r: Discount rate (WACC or Ke)
How to read it
Year-1 cash, r 20%: year-end factor 1/1.20; mid-year 1/1.20^0.5. The gap is the PV of assuming earlier cash — optimism if cash is not actually early.
Numerical example
Year-1 FCFF 120 mn TL, WACC 20%: year-end PV = 120/1.20 = 100 mn TL; mid-year PV = 120/1.20^0.5 ≈ 109.5 mn TL.
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Definitions are educational. They are not investment, credit or tax advice.