Module II· DCF — Mechanics & FCFIntermediate
Question
Worked example — MidCap Software Inc: WACC 9%, FCFs Year 1–5: 10, 15, 22, 30, $38m. Calculate the present value of the explicit period (mid-year convention).
Answer
Example — mid-year discount factors
Inputs:
- WACC: 9%
- Mid-year convention: on
- FCFs: Year 1 $10m, Year 2 $15m, Year 3 $22m, Year 4 $30m, Year 5 $38m
Calculation:
```
Year 1: DF = 1/(1.09)^0.5 = 0.9578 PV = $10 × 0.9578 = $9.58m
Year 2: DF = 1/(1.09)^1.5 = 0.8788 PV = $15 × 0.8788 = $13.18m
Year 3: DF = 1/(1.09)^2.5 = 0.8062 PV = $22 × 0.8062 = $17.74m
Year 4: DF = 1/(1.09)^3.5 = 0.7397 PV = $30 × 0.7397 = $22.19m
Year 5: DF = 1/(1.09)^4.5 = 0.6786 PV = $38 × 0.6786 = $25.79m
Sum of PVs = $88.48m
```
Note
The PV of the explicit period is smaller here than the expected terminal-value contribution — typical for growth companies.