The present value concept discounts the cash flows of a period by the entire period using the discount rate. The DCF valuation method relies on the present value concept to value the cash flows of a business. Therefore the DCF valuation method also discounts the cash flows of a period by the entire period using the discount rate. However, this may not be an appropriate reflection of reality. Thus enters the midyear convention.
And thus enters the mid year convention! The midyear convention is the assumption that cash flows occur in the middle of the year.
In this article, we address what factors have the most weight on your decision to use a midyear convention?