When including a stub period, how should FCF be projected?

When including a stub period in discounted cash flow (DCF) analysis, projecting free cash flow (FCF) should focus on the time frame between the valuation date and the next projected cash flow. By excluding cash flows beyond the valuation date, the analysis accurately reflects only the expected cash flows that fall within this stub period.

The stub period often occurs when there is a partial year involved, such as when the valuation is performed at the end of a quarter or a semiannual period rather than at the end of the fiscal year. This necessitates estimating cash flows only for the remaining period up until the next full forecast period begins.

Including cash flow beyond the valuation date would lead to projections that don’t align with the actual time frame being analyzed, thus distorting the value derived from the DCF model. This ensures that the valuation reflects the company's cash-generating potential only for the relevant period, which is crucial for providing an accurate assessment of its value.