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4. Present Value Computation: Yearend Versus Mid-
Year Cashflow Convention
In computing the present value of all cashflows, Dr. Bajaj
adopted a yearend convention (cashflows discounted as of
yearend), while Dr. Spiro adopted a midyear convention (cashflows
assumed to be received at, and discounted from, midyear).
Because, under the midyear convention, the cashflow for a year is
deemed to have been received 6 months earlier, the discount
factor for the year is slightly greater (and the dollar amount of
the discount itself is slightly smaller) than if the yearend
convention is adopted. Given the same cashflow but a greater
discount factor, the present value of the cashflow is greater.
The parties agree that (1) approximately 60 percent of
Korbel’s champagne sales occur during the last quarter of the
calendar year and (2) as much as 20 percent of such sales occur
during the last week of December. Since Korbel’s revenues are
not spread evenly throughout the year, we are unconvinced that
Dr. Spiro’s use of the midyear convention results in a more
accurate valuation than Dr. Bajaj’s use of the yearend
convention. We adopt the yearend convention.
5. Increase in Korbel’s Value for Nonoperating Assets
a. Introduction
The question here is whether the value of certain
nonoperating assets should be added to the value determined under
the DCF method in determining the value of the shares.
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