FCPE: Calibrating the Explicit Forecast Period with Empirical Survival and Five Corollaries

Abstract We introduce the Explicit Period Calibration Framework (FCPE) – a three-phase, statistically grounded methodology for disciplining revenue growth projections in the explicit forecast period of discounted cash flow (DCF) models using sector-calibrated survival parameters from the BSVM database. The central proposition is that the explicit forecast period, not the terminal value, is the primary locus of valuation distortion: management optimism inflates the base cash flow that the Gordon Growth Model then compounds into perpetuity. The FCPE addresses this problem through a VaR 95 % cap derived from the empirical distribution of sectoral firm survival, making growth projections structurally consistent with observed sector mortality. The BSVM-Adjusted Gordon Model (BAGM) – in which the sector – and size-specific hazard rate is added to the discount rate denominator – follows as an arithmetic consequence of the FCPE’s purification of the cash flow numerator. Five corollaries emerge from the empirical analysis of the BSVM NAICS-4 database (286 industries, three size classes): (C1) the Kroll-Phelps size premium has no anchor in survival data for the intra-non-large firm spectrum; (C2) the Gordon perpetuity assumption is applied at the exact horizon when half of peer firms have already closed; (C3) sector misclassification introduces three times more valuation error than any size premium decision; (C4) the BAGM correction to terminal value is never immaterial across any observed sector or discount rate; (C5) the anomalously high dissolution rate of large firms reveals an unacknowledged taxonomy of exit – economic extinction versus transactional dissolution – that undermines both the size premium calculation methodology and the going-concern assumption in M&A valuation. Together, these findings support a coherent reinterpretation of the WACC as a pure cost-of-capital construct from which the mortality component – currently embedded in the size premium as a proxy – should be relocated to the model structure. The two-stage structure of the framework – Stage 1 correcting the explicit period cash flow numerator through the FCPE, Stage 2 correcting the terminal value denominator through the BAGM – establishes a protocol that is simultaneously empirically grounded, algorithmically implementable, and consistent with existing valuation standards under ASC 805, ASC 820, IFRS 3, and IFRS 13. The supplementary spreadsheet operationalizes Stage 1; the companion paper (DGJBVELA.2026.0018) provides the empirical foundation for Stage 2.