BZT Dictionary®

A-Z Hem
Discounted cash flow
DCF

"DCF" is an abbreviation of "Discounted Cash Flow" and is a method for calculating what a future payment is worth today (present value).

An example: Assume that you have been promised €100 in a year. If the rate of interest (the discount interest rate) is set at 10%, the value today is €90.90.

The method is really a "backwards calculation" of interest. You can compare the reverse situation. If you invest €90.90 today and get 10% annual interest you will have €100 in a year.

DCF calculations are used, for example, in connection with the valuation of enterprises -- compare with "NPV".


Image: Shutterstock & Vestadil

Deal
Deal
A synonym for transaction or agreement. It can encompass both complex transactions and simple agreements.

Image: Shutterstock

Deal flow
The flow of business opportunities (investment proposals) which reach an investor.
Debt

A debt (or liability) is a commitment to pay back a sum of money. The repayment often must be made within a specified time. Amortization is a step-wise repayment of a debt. Examples of debt or liability items on a balance sheet are bank loans, accounts payable and taxes.

The balance sheet item Equity capital is seen as a debt or liability to the shareholders, but without a time for repayment being determined. Dividends can be regarded as interest to the owners.

Debt free
Debt-free company

The term debt-free company means that the market value of the company's shares (the equity capital) plus interesting-bearing loans is equal to the total cost which an investor would have to pay to acquire the company and repay the company's loans. The company is then considered to be "debt-free".

An interesting reflection is that the company's value (compare "Enterprise Value") increases if the debts increase. But it must be noted that the value of the shares (the equity) is unchanged, or perhaps declines if increased debt means that risk in the company increases.


Image: Shutterstock

Debtor

A debtor is the term for someone who has a debt to someone else. The person to whom the debtor has a debt is called creditor. In other words, a creditor has a claim against a debtor.

Crises
Deflation

The term "deflation" means the percentage decline in the general price level from one point in time to another. In order to get an understanding of the price level, the changes in a large number of products (a basket with some 90 products and services) are measured over a specific period of time, which may be months, quarters, or years. Changes in the general price level can be translated into a consumer price index (CPI) and is used, among other things, to adjust agreements, rents, allowances, etc. Read more under "Inflation".

More

Deflation is the opposite of inflation and means that growth in the country's economy has stopped and is negative. Long periods of deflation are unusual, but after the financial crisis of 2008 the USA and several countries in Europe were affected by persistent deflation. Central banks can to some extent counteract deflation by lowering their lending interest rates (discount rates) and increasing the quantity of money (printing new bills).

In periods of deflation, those who save and those who wait to make investments and purchases are the winners, since prices and the value of assets decline. Cash is king and it is best to wait until prices have hit bottom.

Deflation for an extended period of time is damaging for the economy, especially if the value of important assets such as real estate, residences and shares declines. In the downward spiral which deflation entails, both investors and consumers hold off on larger investments and purchases -- which further drives the deflation. A persistent deflation will lead to inequalities in wealth, to unemployment, lower wages and increased political unrest. Periods of deflation are characterized by generalized pessimism and negative views of future opportunities.


Image: Shutterstock

Derivatives
Derivative

A "derivative" is a complicated financial instrument whose value is based on the value of one or more underlying assets. For example, derivatives may be tied to interest rates, currencies, shares or raw materials. Share options are an example of a derivative.

An investor, or a fund manager, can use derivatives partly defensively to minimize risk in a portfolio and partly offensively to increase return. Companies, too, use derivatives, for example to minimize exchange rate risks in customer receivables invoiced in foreign currencies or as a protection against interest rate increases on loans.

More

A derivative is a complicated (risky) investment alternative which is built to some extent on speculation. It is essential to know what you are doing and to be well informed about trading in securities. The derivative provides an opportunity for increased return or reduced risk -- you just have to choose. An investor can obtain growth in the value of her or his portfolio but at the same time be exposed to new risks, e.g., market risks (if the underlying value "goes in the wrong direction") or credit risks (if the counterparty cannot pay).

The two most common types of derivatives are:

  • Futures: A buyer and a seller agreed on price, terms and conditions for payment and delivery of a specific asset on a specific day in the future.
  • Options: There are two main types of options. The "offeror" (i.e. person or company) who grants an option can either sell an opportunity to purchase or buy an opportunity to sell an asset. The former is commonly named "call option" and the latter a "put option". The buyer of the option pays a fee (a premium) for the right to buy or sell the asset. The buyer obtains the right, but not the obligation, to purchase or sell the asset on terms and conditions agreed upon in advance, at an agreed price, and with delivery at a specific point in time. The person who sells and gets the premium for the option, by contrast, is forced to sell or to purchase the asset if the option is exercised.

How does this work? Derivatives can be as complex as you wish, but in brief the derivative gives an investor an opportunity to manage risks, that is, to choose if she or he wants to increase or to reduce the risk in her or his securities portfolio. For example, by purchasing a put option an investor in shares can sell the shares on a specific day at a price determined today and thereby obtain protection against a downturn on the securities exchange which she or he fears may occur.

Similarly, an investor can obtain a lever on her or his holdings by purchasing a call option to buy a specific share on a specific day at a price determined today. The option will be exercised if the exchange goes up and the price exceeds the price the investor has the right to purchase the share for. If the stock exchange goes to the wrong direction, the investor in these two examples will not exercise the option, and will hence lose the capital which was used for purchasing the options.

Derivatives are purchased and sold in precisely the same way as other liquid securities. The derivatives market is a large, global market which performs an important function in the financial system. The opportunities for combining protection and a lever are in reality very much more complicated than in the examples above.

Trade in derivatives takes place partly on regulated securities exchanges and partly OTC (over the counter). OTC means that the buyer and the seller carry out the transaction directly between themselves and determine the price and terms and conditions without oversight from a securities exchange. On a securities exchange the trading is transparent, with known prices, terms and conditions, and delivery dates. Generally speaking, the liquidity is better on a securities exchange, that is it is easier for find a buyer/seller and to make a deal


Image: Shutterstock

Development capital

Capital for the development of a company or a business. Synonyms are "Growth capital" and "Expansion capital".

Dilution
When a company issues new shares, the percentage ownership of every existing share is diminished. The shares and the owners become diluted. If, for example, a company has a total of 1,000 shares and issues 300 new shares, the dilution will be 30%.
Warning Sign
DINGO
A warning! An abbreviation which means: "Don't Invest – No Growth Opportunity"!

Image: Shutterstock

DINKY
DINKY

Is an acronym that stands for "Dual Income No Kids Yet." It describes couples with high earnings potential who do not have kids and are between 25-40 years old. They are certainly planning to have children, but not yet. They take the advantage of a freer lifestyle and are, therefore, a very interesting target for the more expensive and exclusive consumer products and services. They have the time and can afford everything from frequent restaurant visits andexpensive cars to exclusive clothing and travel.

DINK (Dual Income No Kids) is a similar expression but refers to childless couples with high incomes of all ages - up to retirement. Products and services are adapted and expanded for those people with a more mature lifestyle. For couples without children, in middle age and older, investments in real estate, living abroad and exclusive experiences are examples of products and services likely to be of interest.


Image: Shutterstock

Discounted cash flow
Discounted cash flow
Current calculated value of future cash flow. See more under "DCF".

Image: Shutterstock & Vestadil

Dividend cover

A key ratio which measures the number of times a dividend can be paid from the year's profits and is stated as €/share or $/share (depending of local currency).

A low ratio may mean that too much of the profit is being paid out to the owners. A high ratio provides security that the company has capacity to dispense the capital, which is being paid out and, if the profit level is maintained, is a good sign for future dividends and direct return on the shares.

Dog
Dog
An expression for a very bad investment, product or business. A dog is an investment with a return which is much lower than expected and lower than comparable investments.

Image: Shutterstock


Doulbe digit
Double-digit

An expression for describing a powerful change in a company parameter (new orders, receipts, costs, etc.). For example, if a company has a double-digit growth in sales, this means that growth during the measuring period increased by a double-digit percentage number between 10% and 99%. In reality this often involves a change of 10%-20%.


Image: Vestadil

Downside protection

A collective name for contractual devices which an investor can use to protect itself against losses if an investment declines in value. For example, an investor may have the right to free shares if the company does not live up to expectations or if a future new issuance of securities is made at a lower company valuation than when the investor came in as an owner.

Another example of downside protection is convertible loans. Partly the nominal value of the loan amount is independent of the valuation of the shares and partly the option portion (the right to convert to shares) is protected against a decline in value provided that the conversion price can be adjusted downwards if the company does not meet expectations or cannot repay the loan.

Baisse
Downturn

Downturn on a securities exchange, fall in stock prices. Another expression which is used is the French word "baisse" which means reduction. The opposites of downturn and baisse are upturn and boom (French: hausse). See also "Bear market".


Image: Shutterstock

Drag Along
Drag along

A device to "drag along" all owners in the event of a sale of the company. This is a contractual provision in a shareholders' agreement by which one (or several) principal owners can require that all shareholders sell their shares if an offer for the company is received which the principal owners accept.

The contract paragraph "Drag along" gives the principal owner, in a sell situation, control over all shares in the company. This is valuable for the principal owner since a buyer of the company can require that the principal owner deliver 100% of the shares.

A "Drag along" is particularly important in certain cases if the minority shareholders own more than 10% of the company. A buyer who gets more than 90% of the shares in a company may, with support from legislation (in some jurisdictions) compel the surrender of the rest of the shares. This right disappears if one or several of the minority owners have more than 10% of the shares and are not willing to sell.


Image: Shutterstock

Drawdown

An example of a "drawdown" is when a company (its owner or Board of Directors) has a right to pull down financing for the company from an amount already set aside by the investors.

In some cases, an investor does not want to pay out the whole amount but instead commits itself to do so in stages whenever the company needs the financing. If the financing relates to a young company, in a start-up phase, this is sometimes called "spoon feeding".

Another example is venture capital and Private Equity funds which are financed in stages, where capital can be drawn down from the funds' investors whenever investments in various companies are made.

See also

DD
Due diligence, DD

A structured, detailed and penetrating review of a business or a company which new investors make before an acquisition or an investment. The inspection is made with "due diligence" -- hence the name. The investor develops an understanding of the company's strengths, weaknesses, risks and opportunities.

The DD is a check on whether the description of the business which the investor has received agrees with reality. The design and extent of a DD is situation specific and depends on the business's industry and size. It may contain sections for:

  • Legal issues.
  • Financial information.
  • Commercial issues.
  • The company's management and personnel.
  • Morale, ethics, CSR.
  • Tax issues.
  • Pension commitments.
  • External and internal environment.

The investor usually engages independent advisors to carry out the review of selected parts of the enterprise.

See also


Image: Shutterstock