How does the terminal value change when using the Gordon Growth method along with the mid-year convention?

When utilizing the Gordon Growth method in conjunction with the mid-year convention for calculating terminal value, it is essential to recognize that the terminal value is typically based on the perpetuity formula, which assumes cash flows will continue indefinitely at a constant growth rate. The mid-year convention adjusts for the timing of cash flows within the fiscal year, effectively bringing the terminal value forward in time to account for the earlier recognition of cash flows expected to occur at the end of the projection period.

This adjustment is important because, without applying the mid-year convention, the terminal value would be calculated as if it would only be realized at the end of the final year. However, by implementing the mid-year convention, the terminal value is effectively shifted to reflect that it will be received at mid-year, resulting in a timing adjustment that often leads to a higher present value when discounted back to today.

This adjustment is not simply an increase in value due to timing but rather a recalibration of the entire cash flow model to appropriately reflect when cash flows are expected to be realized. Hence, the terminal value is indeed pragmatically adjusted forward in time, leveraging the mid-year convention principles.