What effect does using the mid-year convention have on implied values in a DCF?

Using the mid-year convention in a Discounted Cash Flow (DCF) analysis generally leads to higher implied values due to the reduction in discount periods for the expected cash flows. This method adjusts the timing of cash flows, assuming they are received at the middle of the year rather than at the end. As a result, each cash flow is discounted for a shorter period compared to if it were discounted at year's end.

This shorter discounting period means that the present value of each cash flow is higher because cash flows that occur sooner are worth more in today’s terms than those occurring later. Therefore, when you sum the present values of these cash flows using the mid-year convention, the overall implied value of the business or project tends to increase compared to a scenario where cash flows are assumed to occur at the end of the year. This technique is particularly useful for improving the accuracy of valuations in cases where cash flows vary significantly throughout the year.