Should you use mid-year or year-end convention in a DCF?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Mid-year convention assumes cash flows are received evenly throughout the year (discounted at t=0.5, 1.5, etc.), which is more realistic. Year-end convention (t=1, 2, etc.) assumes all cash arrives on Dec 31, which slightly understates value. Mid-year typically increases EV by 2–4%. Both are acceptable; just be consistent and state your assumption.
WHAT INTERVIEWERS LISTEN FOR
- ✓Mid-year convention more realistic
- ✓Year-end convention understates value
- ✓Mid-year increases EV 2-4%
- ✓Consistency and stating assumption
COMMON MISTAKES
- ✗Using both conventions inconsistently
- ✗Not adjusting terminal value for mid-year
- ✗Believing year-end is always correct
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