When using a growth perpetuity to calculate TV under mid-year timing, where is TV incorporated in the cash flow timeline?

When using a growth perpetuity to calculate TV under mid-year timing, where is TV incorporated in the cash flow timeline?

• A. In the ending period
• B. In Year 1
• C. Not included
• D. In Year 3

Answer: (A)

Terminal value from a growth perpetuity represents the value of all cash flows continuing after the forecast horizon, and it is placed as a lump sum at the end of the projection. Under mid-year timing, cash flows are assumed to occur mid-year, but the perpetuity starts after the last forecast period, so its value sits in the ending period. You then discount that ending-period value back to the present using the mid-year convention. This is why TV is incorporated in the ending period. Placing it in an earlier year would imply the perpetual cash flows begin too soon, and omitting it would neglect the infinite stream of future cash flows.

Terminal value from a growth perpetuity represents the value of all cash flows continuing after the forecast horizon, and it is placed as a lump sum at the end of the projection. Under mid-year timing, cash flows are assumed to occur mid-year, but the perpetuity starts after the last forecast period, so its value sits in the ending period. You then discount that ending-period value back to the present using the mid-year convention. This is why TV is incorporated in the ending period. Placing it in an earlier year would imply the perpetual cash flows begin too soon, and omitting it would neglect the infinite stream of future cash flows.