DCF is intrinsic valuation methodology that value the company on it future cash flow generation capability. STEP 1 - forecasting 5 to 10 year cashflows. You project this by projecting EBIT and adjusting it for tax, capex, dep and amortization and change in NWC. Projection depend on various assumption related to growth, revenue, cost etc. STEP 2- We have projected 5year cash flow but the company will operate more then that. So we have to calculate the cash flow from year 6 to infinity in one number which is called the terminal value. Terminal value can be calculated by multiple approach or Groden growth method. STEP 3 – Now that we have calculated the future cashflow and terminal value, we have to discount them to present value , for that we use are WACC as discount rate. Then add all the PV together to calculate enterprise value. You use a stub period when you're valuing a company before or after the end of its fiscal year and there are 1 or more quarters in between the current date and the end of the fiscal year • For example, it's currently September 30th and the company's fiscal year ends on December 31st In this case it wouldn't be correct to assume that Free Cash Flow only starts on January 1st of the next year, because there are still 3 months between now and the end of the year and the company still generates FCF in those 3 months To account for these 3 months, use 0.25 for the discount period, and then use 1.25 for the discount period for the first full year of the model, 2.25 for the next year and so on. Mid year discounting: • You use it to represent the fact that a company's cash flow does not arrive 100% at the end of each year - instead it comes in evenly throughout each year • With the mid-year convention, we would instead use discount period numbers of 0.5 for the first year, 1.5 for the second year, 2.5 for the third year, and so on • The end result is that the mid-year convention produces higher values since the discount periods are all lower