Comprehensive Study Guide for Finance License Examination in Finance: Theory, Calculations, and Licensing Grids Methods, and License Exam Grids Exam Grid Tests

Fundamental Concepts and Definitions of Finance

In the narrow sense, the notion of finance is defined by specific financial relations that express a transfer of monetary resources without equivalent and with a non-reimbursable title. These are famously categorized as classic financial relations and are primarily reflected within the framework of public finance. While broader definitions of finance might encompass credit relations (loans with interest), insurance-reassurance relations (transfers based on random events), or corporate finance (formation and distribution of funds for enterprise activities), the strict definition focuses on the non-reimbursable transfer of resources. These activities are carried out under the auspices of governing bodies such as the Ministerul Educației și Cercetării and are central to the academic curriculum at Universitatea „Lucian Blaga” din Sibiu, specifically within the Facultatea de Ştiinţe Economice.

Bond Characteristics and Financial Instruments

A bond is a financial title that represents a debt instrument for the issuer and a credit instrument for the holder. It is essential to distinguish bonds from shares; whereas a share represents a part of the social capital, a bond designates the holder as a creditor of the issuer. Consequently, bonds do not confer voting rights to the holder, as they do not represent ownership in the company. The income obtained by a bondholder is provided in the form of interest, often referred to as annual coupons. The duration of a bond's life is limited to its maturity period, unlike shares which have an unlimited lifespan. The primary risks associated with bonds include the risk of not collecting income if the issuer has poor financial results and the risk of losing invested funds in the event of the company's liquidation. The value of an annual coupon is calculated using the formula: $V_{cupon} = \text{Nominal Value} \times \frac{\text{Coupon Rate}}{100}$.

Derivative Contracts and Market Operations

Financial derivatives such as futures and options are critical for risk management and speculation. In the context of a futures contract, a "margin call" is an obligatory request sent to brokerage firms, traders, and their clients to supplement funds in a margin account. This occurs when the existing balance falls below the required maintenance margin level needed to cover potential risks. This is distinct from the "marking-to-market" process, which is the daily adjustment of the margin account at the end of each trading session to reflect profits or losses from open positions. Closing a position in derivatives involves a transaction of the same size but in the opposite direction.

Options are term contracts that give the holder the right, but not the obligation, to buy or sell a specific number of underlying assets at a predetermined strike price ($E$) established at the conclusion of the contract. A CALL option is characterized by the buyer paying a premium to gain the right to buy. The seller (writer) of a CALL option has a limited potential gain (the premium) but faces potentially unlimited losses if the price rises significantly, as they are obligated to sell the shares if the buyer exercises the option. Conversely, a PUT option is a contract where the buyer anticipates a price decrease. If an investor buys a PUT option and the price of the underlying asset ($S$) rises (an ascending trend), the investor's result is a limited loss equal to the premium paid ($P$). For investors who sell (write) options, the maximum possible gain is the premium. For those who buy options, the premium represents the maximum possible loss.

To illustrate these principles with specific calculations: if an investor buys a PUT option for 100 shares with a premium of $6500\text{ lei}$ at a strike price of $1100\text{ lei}$ per share, and at maturity the market price is $1000\text{ lei}$, the gain is calculated as: $(1100 - 1000) \times 100 - 6500 = 3500\text{ lei}$. If a seller writes a CALL option for 100 shares with an $8500\text{ lei}$ premium at a strike price of $1400\text{ lei}$, and the market price hits $1500\text{ lei}$ at maturity, the seller's result is a loss: $8500 - (1500 - 1400) \times 100 = -1500\text{ lei}$. Generally, buying a Call or selling a Put is initiated when an investor anticipates a price increase.

Corporate Finance: Capital Structure and Share Issuance

The total capital of a firm is composed of equity (capital propriu), short-term debts, and medium-to-long-term debts. A key metric is the global financial autonomy ratio, which can be seen in cases where total debts are $2.4\text{ mil lei}$ and equity is $7.6\text{ mil lei}$, leading to a ratio of 76\text{%}. When a company increases its social capital through the issuance of new shares, several sources can be utilized: new cash or in-kind contributions from shareholders, the incorporation of reserves, or the conversion of debts into social capital. While incorporating reserves increases the social capital and equity, it is considered to have a neutral influence on the overall financing capacity of the firm as it is internally sourced.

When issuing new shares, the relationship between the nominal value ($VN$), the issue price ($PE$), and the market price of old shares ($C$) is typically: $VN < PE < C$. The issue price must be lower than the current market price to ensure the success of the subscription but remains higher than the nominal value. After capital increase, the new market value of a share is determined by the formula: $\frac{N \times C + n \times P}{N + n}$, where $N$ and $n$ represent the number of old and new shares respectively, and $C$ and $P$ represent their respective values. For example, a company with a capital of $170,000\text{ lei}$ ($10\text{ lei}$ nominal value) and a market capitalization of $238,000\text{ lei}$ that issues $130,000\text{ lei}$ in new shares sold with an issuance premium of $3\text{ lei}$ per share will see the post-increase market value of a share settle at $13.6\text{ lei}$.

Public Finance and Modern Theory

Public expenditure involves the use of public financial resources between the state and individuals or legal entities to fulfill state functions. Modern theories of public finance suggest that public expenditures grow over time in both absolute and relative terms. Furthermore, these theories recognize that budget deficits have become a quasi-permanent characteristic of many national budgets. This contrasts with classical views that emphasized the balanced budget as the "keystone" of public finance. Fiscal pressure, a critical indicator in this field, is expressed as the ratio between the sum of all taxes, fees, social contributions, and other fiscal levies (at both central and local levels) and a macro-aggregate indicator like GDP.

Time Value of Money and Financial Calculations

The present value ($VP$) and future value ($VV$) of money are calculated using specific formulas based on interest rate ($r$) and time ($n$). For a single sum of money: $VP = VV \times \frac{1}{(1 + r)^n}$$VV = VP \times (1 + r)^n$ In mathematical tables, these are often represented as factors: ${FA}_{r,n}$ (Present Value Factor) and ${FC}_{r,n}$ (Future Value Factor).

Comparison of specific sums (assuming a 10\text{%} rate):

1. $2000\text{ RON}$ received in 6 years: $2000 \times 0.564 = 1128\text{ RON}$.
2. $1000\text{ RON}$ received today.
3. $150\text{ RON}$ annuity for 8 years: $150 \times 5.335 = 800.25\text{ RON}$.
4. $1250\text{ RON}$ received in 1 year: $1250 \times 0.909 = 1136.25\text{ RON}$. In this comparison, the largest amount is the $1250\text{ RON}$ received in one year.

In debt management, if a firm borrows $100,000\text{ lei}$ to be repaid in 4 equal annual payments (annuities) at a 10\text{%} interest rate on the remaining balance, the annual payment amount is approximately $31,546\text{ lei}$. For a sinking fund scenario where a firm needs to accumulate $50,000\text{ RON}$ in 5 years at 10\text{%} interest, the annual deposit required is $8,190\text{ RON}$.

Investment Appraisal and Project Evaluation

Investment projects are categorized by different life cycles. The "economic life" ($durata de viață economică$) refers to the duration during which the investment produces favorable effects or cash flows. The "accounting life" ($durata de viață contabilă$) refers to the period of full recovery of the initial investment value through depreciation. When evaluating initial investment costs, previous research costs are generally excluded, whereas acquisition costs of fixed assets, personnel specialization, and opportunity costs of firm assets are typically included.

For an investment to be considered attractive in a certain environment, the Net Present Value ($VPN$ or $VAN$) must be greater than zero. Key evaluation methods for certain environments include the NPV method, the Payback period ($termenul de recuperare$), and the Accounting Rate of Return. For example, comparing two projects A and B with an update rate of 10\text{%}, if project A yields an NPV of $12.03$ and B yields $4.21$, project A is superior. When ranking projects by payback period, the project that recovers its initial cost quickest is ranked first (e.g., a sequence such as Project E, then A, B, D, and C).

Financial Performance and Risk Management

Profitability is measured through various ratios. Economic return ($rentabilitatea economică$) is the ratio between profit (benefit) and total assets. Financial return ($rentabilitatea financiară$) represents the yield on equity, calculated as the ratio between profit and equity ($capital propriu$). The impact of debt (leverage) on financial return is significant: if the economic rate of return is greater than the interest rate on debt, borrowing will increase financial return. Conversely, if economic return is less than the interest rate, debt will cause financial return to drop below economic return.

Risk is categorized into several types:

• Economic Risk: Derives from the unpredictable variability of production factors or profit under environmental pressure.
• Financial Risk: Directly proportional to the degree of indebtedness; as debt increases, financial risk increases.
• Bankruptcy Risk: A combination of economic and financial risks plus the effects of conjunctural factors.

Risk measurement involves calculating the dispersion of profit relative to its mean, the elasticity of profit in relation to turnover and the break-even point, and the volatility (Beta) of the firm's stock return relative to general market variations.

Key calculation formulas for value creation include:

• Value Added ($VA$): $\text{Commercial Margin} + \text{Production} - \text{Intermediate Consumption (from third parties)}$.
• Gross Operating Surplus ($EBE$): $VA + \text{Operating Subsidies} - \text{Taxes and similar payments} - \text{Personnel expenses}$.