Discounting with variable valuation date. Often when we start learning about DCF valuation, we assume that we're valuing the company at the start of its financial year. However, in reality, this is rarely the case. In fact, in reality, we'll only be valuing a company at the start of its financial year one in every 365 days. So let's have a look at how we can accurately use DCF to value a company at some other point in its financial year. Here is an example of a company which we want to value exactly halfway through its financial year. So that's at the end of Q2. We're going to use mid-period discounting. So we're gonna assume that cash flows are generated evenly throughout each period so that on average, they occur at the midpoint of each period. So what does this mean for the first financial year? Well, if the cash flow is gonna occur at the midpoint of the period, that's halfway between the end of Q2 and the end of the year. So that means that the cash flow will be generated at the end of Q3 but we're valuing the company at the end of Q2. So that means that we only need to discount our first year's forecast cash flows by a quarter of a year. And so our discount factor for our first set of cash flows will reflect a year count of 0.25. One further thing to remember is that we only want to discount future cash flows, If we're valuing the company halfway through the year, the cash flows generated in Q1 and Q2 are historic cash flows, not future cash flows. So we're also going to need to time a portion, our first year's cash flow forecast so that we're only discounting half of the full year's cash flows. But what about cash flows for the second forecast year? Well, if the cash flow's going to occur at the midpoint in each period, this means that the cash flow in year two will occur halfway through that year, i.e, at the end of Q2 in FY2. But if we are valuing the company at the end of Q2 in FY1, that's exactly one year before the end of Q2 in FY2. So that means we need to discount our second year's cash flows by a full year. So our discount factor for our second year's cash flows will reflect a year count of one, even though we're using mid-period discounting. Now, the year count for the discount factor in subsequent years will then be one whole year on from this point. So the year count for the third year is two and the year count for the fourth year is three. So that's how we calculate discount factors if we're valuing a company at the end of Q2. But what about at other points in the financial year? Let's come up with a process that will work regardless of the exact date. The first thing to identify is the valuation date. Now, typically, we're valuing the company today and we can use the today function in Excel for this. So if we input equals today with empty brackets, then Excel will give us today's date. The next thing to do is to determine the cash flow date for each forecast year. Now, assuming we're using mid-period discounting, this is gonna be the average of the period start date and the period end date. For the first fiscal year, your period start date is the valuation date.

The next thing to do is to work out how many days occur between the cash flow date and the valuation date. This is really straightforward as Excel calculates the day count difference between two dates, just by subtracting one date from the other. We then need to convert the days that we're discounting into a year count. And this can be done by just dividing the days for discounting by 365. We can then put this year count into our discount factor for each period using our standard discount factor formula. The final step is then to time a portion the cash flows for the first forecast year by multiplying our first forecast year's cash flows by the proportion of the year remaining between the valuation date and the end of the first forecast year.