Introduction
In business valuation, discounting plays a crucial role in accurately assessing the present value of future cash flows. Traditionally, discounting methods rely on fixed factors such as 1 or 0.5, depending on whether a valuation date falls at the start or midpoint of the year. However, this approach lacks precision, particularly when valuation dates do not align perfectly with these predefined points.
To enhance accuracy and flexibility, this feature introduces fraction-based discounting, dynamically adjusting discount factors based on the exact number of days remaining from the valuation date to the fiscal year end.
How to Discount Based on Valuation Date
Ensure you are inside a valuation flow and have access to the Valuation Overview step.
Steps to apply a discount based on the valuation date.
Open Parameters
Click the Change Parameters button.
Navigate to the Discounting Options
In the drawer, go to the DCF section.
Select an Adjustment Type
Click the Adjustment Type dropdown.
Choose one of the following options:
Mid-Year Adjustment – Applies a standard mid-year convention for discounting.
Adjustment to Valuation Date – Adjusts the discounting factor based on the exact number of days remaining in the year.
None – No discounting adjustment is applied.
What Happens When You Select a Discounting Period?
When choosing a discounting period, the timing of cash flows is adjusted based on the selected method. This affects how future cash flows are discounted, ensuring alignment with the valuation date.
Mid-Year Adjustment: Assumes cash flows occur mid-year, setting the first discounting period at 0.5 years, followed by 1.5 years, 2.5 years, and so on. This method smooths out the effect of valuation timing within the year.
Adjustment to Valuation Date: Calculates discount periods based on the exact number of days remaining from the valuation date to the fiscal year-end. For example, if the valuation date is September 30, 2024, and the fiscal year ends on December 31, 2024, the remaining period is 91 days, resulting in an initial discounting period of 0.25 years (91 ÷ 365). Subsequent periods follow as 1.25 years, 2.25 years, and so on.
None (Full-Year Discounting): Applies 1-year intervals without adjustments, meaning the first period is always 1 year, the second is 2 years, the third is 3 years, and so forth, regardless of when the valuation occurs.
Once determined, these discounting periods are used as exponents in the discount factor calculations, ensuring that cash flows are appropriately discounted based on the selected method.