Mechanics
Mid-Year Convention
Real cash flow arrives roughly uniformly through a year, not on the last day. Mid-year convention adjusts the discounting to reflect that. The effect on enterprise value is small but non-trivial, especially for large terminal values.
Direct answer
Under mid-year convention, each year of cash flow is treated as if received at the midpoint of the year and is therefore discounted by (1 plus WACC) to the power (t minus 0.5) rather than t. Terminal value at end of year n is discounted by (1 plus WACC) to the power (n minus 0.5). The effect lifts enterprise value by roughly the square root of (1 plus WACC), i.e. about 4.9 percent at WACC of 10 percent.
Formulas
Year-end vs mid-year
Year-end convention (each year of FCF)
PV(FCFt) = FCFt / (1 + WACC)t
Mid-year convention (each year of FCF)
PV(FCFt) = FCFt / (1 + WACC)t - 0.5
Mid-year convention (terminal value)
PV(TVn) = TVn / (1 + WACC)n - 0.5
When to use it
Conventional, not contentious
Use for any high-precision DCF
Sell-side equity research, M&A fairness opinions, LBO models for return-target precision. Mid-year is the professional default.
Skip for back-of-envelope work
Sketching a thesis or a quick screen, year-end is simpler and you should not be in the 5-percent precision zone with a back-of-envelope model.
Related
Where to go next
Last verified June 2026. Source: Koller Valuation 7th ed., Chapter 8.