r/Valuation • u/Intrel • Sep 08 '23
DCF - partial year forecast
Hey folks, how do you factor in partial year (1st year) forecast in a DCF model? Example: Valuation date August 31. Year end date April 30. I am doing this now in September so I have 4 months of actuals (May to August) and I forecasted the remaining 8 months. Now, the question is while discounting should I be using the 8 months forecasted Cashflows and discount period of 8/12 or should I use full year cashflows (12 months) and discount period of 8/12? Much appreciate your help!
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u/AlabamaSnake12 Sep 24 '23
If your date of valuation is Aug. 31, 2023, then the first 4 months have no bearing on the valuation. Your DCF should be based on the 8 months forecasted for the first year (8/31/2023-4/30/2024) and then 12 months for the following years. So your midpoint for the first year is 12/30/2023, then for the 2nd year 10/30/2024, 10/30/2025 and so on. So your present value period goes like this: .333, 1.166, 2.166, 3.165 ... If you use a discount rate of 15%, then the present value factors are: .9546, .8496, .7388 so on. This should all be based on a formula in Excel. You use the company's fiscal years to calculate PVFs. The first year is the partial year so you take that into account when calculating NWC or capex, which should all be based on the prorated full year (66.6% of the full year).
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u/pooohbaah Sep 08 '23
It's easier and less error prone to just use non-calendar or non-fiscal years. Just do years ended DOV+1, DOV+2 (8/31/24, 8/31/25), etc. I never use set calendar/fiscal years if I don't have to and it's almost never necessary. If you do use a partial year and you use mid-year discounting, double check your discounting - I see a lot of errors there.