Module II· DCF — Mechanics & FCFAdvanced
Question
How does the stub period work in a DCF with a mid-year valuation date?
Answer
Mechanics
Calculation
```
Valuation date September 30 = the last October 1 is 9 months ago, Year-1 forecast ends December 31, stub = 3 months (0.25 years)
FCF Year 1 is scaled to 3/12 (stub FCF = full-year × 0.25)
```
Mid-stub discount: 1/(1+WACC)^0.125.
```
Year 2 (mid-year) = 0.75 years after the valuation date
TV at the end of Year 5 = 4.25 years after the valuation date
```
Complexity at highly seasonal companies: the stub FCF is not linear — e.g. a Q4-heavy business generates 50% of annual FCF in those 3 months.
Deep diveShow more details
Pitch tip
A stub DCF is standard for mid-year closings — juniors don't do it off the top of their head, but senior analysts should be able to.