DCF conventions and the errors that sink you
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
6 min read · updated July 2, 2026
You already know the shape of a DCF: project cash flows, discount them, add a terminal value, get to a per-share number. If you don't, read The DCF, explained first. This article is about the part that actually separates candidates. The conventions and the order of operations. This is where a smart student who "gets" the concept still fumbles the walk-through and loses the room.
Nobody flunks a Superday for not knowing what a DCF is. They flunk it for saying "discount the cash flows" and then doing it wrong when pushed.
The mid-year convention
Standard textbook discounting assumes every year's cash flow lands on December 31. That's a lie. A business collects cash all year long, roughly evenly. So on average the cash arrives at the midpoint of each year, not the end.
The mid-year convention fixes this by moving each discount period back half a year. Year 1 gets discounted at period 0.5 instead of 1.0, year 2 at 1.5, and so on.
Because you're discounting over a shorter time, every present value goes up a little. The uplift is roughly . At a 10% WACC that's about a 5% bump to your valuation. Not huge, but not nothing, and interviewers love to check whether you know it exists.
Mid-year convention makes the value go up, never down. If someone asks "does mid-year raise or lower your value?" the answer is always higher, because you're waiting less time to get the same cash.
One subtlety on the terminal value. If you build TV with the Gordon Growth (perpetuity) method, discount it at the mid-year period of the final year too. If you build it with an exit multiple, the multiple is applied to a full-year metric at year-end, so most people discount that TV at the full final period, not the half. Be ready to explain that split. It trips people up.
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Frequently asked
- What is the mid-year convention in a DCF?
- The mid-year convention discounts each year's cash flow as if it arrives at the midpoint of the year rather than year-end, since a business collects cash all year long. Year 1 is discounted at period 0.5, year 2 at 1.5, and so on. It always raises your value, roughly a 5% bump at a 10% WACC.
- Why do you present a DCF as a range instead of a single number?
- Because a DCF hangs on two fragile assumptions, the discount rate and the terminal growth rate, and terminal value alone drives 60 to 80 percent of the total. You show a sensitivity grid with WACC across the top and terminal growth down the side, then give the honest range rather than false-precision to one decimal.
- What are the most common DCF mistakes that fail candidates?
- The killers are sequence and bridge errors, not concepts. Forgetting to discount the terminal value back to today, using the wrong number of discount periods, and stopping at enterprise value without subtracting net debt to reach equity value. Mixing levered cash flow with WACC is another classic. Pick one lane and stay in it.
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