Series 16 Practice Exam.
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1. A supervisory analyst reviewing a draft equity research report notices the analyst included a specific numeric price target but no discussion of the valuation methodology used to derive it. What should the supervisory analyst require before approving the report?

• A. A footnote stating that the price target is not a guarantee of future performance
• B. Removal of the price target entirely so the report cannot be linked to a specific return expectation
• C. Confirmation that the price target matches the average of prices published by other firms' analysts
• D. Addition of a clear explanation of the valuation methodology and key assumptions supporting the price target

2. A registered representative in the investment banking department requests that a research analyst raise the rating on a company because the firm is pitching that company for an upcoming underwriting. As the supervisory analyst reviewing this request, what is the appropriate action?

• A. Delay the rating change until after the underwriting closes, then apply it retroactively.
• B. Require the investment banker to co-sign the report before publication.
• C. Decline the request and document that the rating must be based solely on the analyst's independent research judgment, insulated from investment banking influence.
• D. Approve the rating change since a pending underwriting relationship signals strong issuer interest.

3. A research report scheduled for release contains a rating downgrade on a company for which the firm is currently serving as underwriter in a pending secondary offering. What supervisory concern is most significant?

• A. Whether the report's font formatting matches firm branding standards.
• B. Whether publication during the offering period could conflict with restrictions on research activity around the distribution.
• C. Whether the downgrade will upset the sales desk's institutional clients.
• D. Whether the analyst used a spreadsheet instead of the firm's approved valuation template.

4. A firm's research analyst is asked by the retail sales department to prepare a simplified one-page summary of an existing full report for distribution to individual investors. What must the supervisory analyst confirm about the summary before approval?

• A. That the summary retains a fair and balanced presentation of risks and conclusions consistent with the underlying full report.
• B. That the summary omits the rating so retail clients are not influenced by it.
• C. That the summary includes additional bullish language to make it more appealing to retail investors.
• D. That the summary is created by the sales department rather than the research department to save time.

5. Which of the following is the most appropriate reason for a supervisory analyst to reject a draft research report during pre-publication review?

• A. The report presents a "buy" recommendation without providing analysis reasonably supporting that conclusion.
• B. The analyst's writing style differs from other analysts on the team.
• C. The report's conclusion is less bullish than the sales desk expected.
• D. The report is longer than the firm's typical page count for that sector.

6. A research analyst's compensation package includes a bonus component explicitly tied to the revenue generated by the investment banking department. During report review, what should the supervisory analyst be most alert to?

• A. Whether the analyst's bonus is paid quarterly or annually.
• B. Whether the analyst's manager is also compensated based on trading volume.
• C. Whether the compensation structure could bias the analyst's ratings or price targets toward outcomes favorable to investment banking business.
• D. Whether the analyst discloses her compensation amount in every report she publishes.

7. A report contains a chart showing the subject company's stock price performance next to the analyst's price target, but the chart's time axis is mislabeled in a way that makes the stock appear to have already met the target. What action should the supervisory analyst take?

• A. Require correction of the chart before publication because it could mislead readers about the company's actual performance relative to the target.
• B. Add a footnote after publication noting the chart error.
• C. Ask the analyst to remove the price target and keep the chart as is.
• D. Approve the report since the underlying price target number itself is accurate.

8. A supervisory analyst is reviewing a research report on a company that recently disclosed a material accounting restatement. The analyst's report maintains an unchanged "buy" rating and price target from before the restatement, with no discussion of the restatement's implications. What is the most appropriate supervisory response?

• A. Approve the report unchanged since restatements are accounting matters outside the scope of equity research.
• B. Approve the report and require only that the analyst issue a correction if the restatement later proves material.
• C. Approve the report but instruct sales not to mention the restatement to clients.
• D. Require the analyst to address the restatement's impact on the underlying financial assumptions before the rating and target can be approved as currently supported.

9. Which practice would most likely violate the requirement that research communications present a fair and balanced view of a covered company?

• A. Disclosing that the firm has received investment banking compensation from the subject company in the past 12 months.
• B. Including both bullish and bearish factors identified during the analyst's review.
• C. Selectively highlighting only the positive catalysts while omitting known negative developments discussed internally.
• D. Noting risk factors alongside the recommendation and price target.

10. An analyst wants to publish a research note reiterating a "buy" rating shortly after appearing in a televised interview making similar bullish comments about the same company. What should the supervisory analyst verify?

• A. That the public comments were consistent with the firm's currently approved rating, price target, and substantiated views on the company.
• B. That the interview occurred outside of market trading hours.
• C. That the television appearance was scheduled through the marketing department.
• D. That the analyst wore appropriate attire during the interview.

11. During review, a supervisory analyst finds that a research report recommends a security also held in the analyst's personal brokerage account, a position the analyst opened the week before the report's scheduled release. What is the appropriate next step?

• A. Approve the report as long as the position size is small relative to the analyst's net worth.
• B. Investigate the timing and require appropriate disclosure of the personal holding, consistent with restrictions on analysts trading against or ahead of their own recommendations.
• C. Approve the report once the analyst agrees to hold the position for at least one year.
• D. Approve the report and require the analyst to disclose the position only if a client specifically asks.

12. Which of the following would most appropriately be flagged during supervisory review as promissory or exaggerated language in a research report?

• A. "Based on our model, we estimate a price target of $50 over the next 12 months."
• B. "Risks to our thesis include slower-than-expected margin expansion."
• C. "This stock is guaranteed to outperform the market over the next year."
• D. "We rate the stock a buy based on our discounted cash flow analysis."

13. A supervisory analyst is reviewing a research report where the analyst changed a rating from "hold" to "sell" the same week the firm lost a competitive bid to serve as underwriter for the subject company's planned offering. The analyst's written rationale cites deteriorating fundamentals documented over the prior two quarters. What should the supervisory analyst do?

• A. Require the analyst to reverse the rating back to "hold" until after the competing firm's offering closes.
• B. Approve the report only if the analyst agrees to omit any mention of the lost underwriting mandate.
• C. Evaluate whether the documented fundamental deterioration independently supports the downgrade, and approve if the analysis is substantiated regardless of the timing coincidence.
• D. Reject the downgrade automatically because of the timing coincidence with the lost underwriting mandate.

14. A junior analyst asks the supervisory analyst why draft reports cannot be sent directly to clients before compliance review is complete. The best explanation is that:

• A. Direct distribution would bypass the firm's printing budget approval process.
• B. Pre-review confirms the report meets disclosure, substantiation, and fairness standards before investors rely on it.
• C. Clients prefer to receive reports only after market close.
• D. Draft formatting differs from the firm's final template.

15. A supervisory analyst reviewing a report notes that the analyst's rating history shows the vast majority of covered companies rated "buy," with almost none rated "sell," despite a broad mix of company fundamentals. What should the supervisory analyst consider?

• A. Whether the analyst should be required to issue an equal number of buy and sell ratings regardless of fundamentals.
• B. Whether the firm's rating scale should be eliminated entirely.
• C. Whether the report format should switch from ratings to numerical scores only.
• D. Whether the distribution of ratings reflects genuine independent analysis rather than a bias toward favorable coverage of banking relationships or covered issuers.

16. An investment banker asks a research analyst to review a draft offering prospectus and provide comments on the business description section before the deal is announced publicly. What is the primary supervisory concern?

• A. Whether the prospectus is formatted according to firm style guidelines.
• B. Whether this interaction creates the risk of the analyst receiving material non-public information or being improperly influenced ahead of publishing research on the company.
• C. Whether the analyst is being paid an additional fee for the review.
• D. Whether the review will be completed before the analyst's other report deadlines.

17. A sales representative asks the research analyst to send an advance copy of an unpublished report to a large institutional client who is a personal friend of the representative. What should the supervisory analyst do?

• A. Deny the request, since selective early distribution of research to a specific client would violate requirements for fair and simultaneous availability of research conclusions.
• B. Approve the request but require the sales representative to disclose the friendship to compliance afterward.
• C. Approve the request as long as the client signs a confidentiality agreement.
• D. Approve the request only if the client is charged a premium fee for early access.

18. The subject company's investor relations department contacts the research analyst directly to request that a specific unfavorable comment be removed from an upcoming report before publication. What is the appropriate response?

• A. Publish the report early to avoid further contact from the subject company.
• B. Forward the request to the investment banking department for a final decision.
• C. Allow the subject company to review only factual accuracy, not the analyst's opinions or conclusions, and decline to remove substantiated analytical commentary at the company's request.
• D. Remove the comment immediately since the subject company should approve its own coverage.

19. A supervisory analyst learns that a research analyst has been invited by the investment banking department to participate in a roadshow marketing a company's securities offering. What must the supervisory analyst evaluate?

• A. Whether the roadshow venue can accommodate the expected number of attendees.
• B. Whether the analyst's participation would compromise the analyst's independence or create the appearance of assisting in marketing the offering.
• C. Whether the roadshow will occur during the analyst's scheduled vacation.
• D. Whether the analyst has adequate frequent flyer miles for the required travel.

20. A member of the legal department asks the research analyst to review a competitor's pending litigation disclosure before the analyst's report is finalized, sharing details not yet publicly available. What is the supervisory concern?

• A. Whether sharing non-public litigation details with the analyst could result in the report being based on material non-public information.
• B. Whether the legal department has proper authority to request analyst assistance.
• C. Whether the analyst has enough time before the report deadline.
• D. Whether the litigation is likely to be resolved favorably.

21. An external reporter contacts a research analyst directly requesting comment on a controversial rating change published earlier that day. What should the supervisory analyst confirm before the analyst responds?

• A. That the analyst will be paid for the interview.
• B. That any comments to the media remain consistent with the firm's published, substantiated research and applicable communication policies.
• C. That the reporter's publication has a favorable view of the firm.
• D. That the interview is scheduled for a time convenient to the marketing department.

22. A supervisory analyst discovers that an investment banker has been sending the research analyst detailed feedback on draft valuation assumptions before a report on a client company is finalized. What is the most appropriate response?

• A. Allow the interaction but require the analyst to accept at least half of the suggested changes.
• B. Allow the interaction only during non-business hours.
• C. Investigate and restrict the interaction, since investment banking personnel influencing the substance of a research analyst's valuation work creates an improper conflict.
• D. Allow the interaction to continue as long as the banker's comments are put in writing.

23. A supervisory analyst is asked to approve a plan for the research department to share a "restricted list" of companies with the compliance and legal departments but not with sales or trading. What is the purpose of this arrangement?

• A. To help sales prioritize which stocks to actively promote to clients.
• B. To give compliance and legal exclusive investment opportunities in restricted names.
• C. To let the trading desk decide which restricted names to trade more aggressively.
• D. To maintain information barriers by limiting knowledge of restricted names to control functions that monitor conflicts, without tipping sales or trading.

24. While reviewing a report, a supervisory analyst finds that the revenue figures cited in the narrative text do not match the figures shown in the accompanying financial summary table. What should be required before approval?

• A. Replace both figures with a rounded estimate to split the difference.
• B. Publish the report with the table removed to eliminate the inconsistency.
• C. Publish the report and let readers determine which figure is correct.
• D. Reconcile the discrepancy and correct the report so the narrative and table figures match the underlying source data.

25. A report's footnotes cite a third-party data provider as the source for industry growth statistics, but the actual figures in the report do not match the data provider's published numbers. What should the supervisory analyst require?

• A. Approval with a note that estimates may vary by source.
• B. Correction of the figures to accurately reflect the cited source, or citation of the correct source actually used.
• C. Removal of the footnote citation so the mismatch is no longer visible.
• D. Approval since footnotes are not considered part of the substantive report content.

26. A supervisory analyst spot-checks a report's discounted cash flow calculation and finds that the analyst's spreadsheet uses a different discount rate than the one stated in the narrative text describing the valuation approach. What is the correct response?

• A. Approve the report and note the discrepancy for the next quarterly update.
• B. Change the narrative text to whatever rate produces the stated price target, regardless of the analyst's stated rationale.
• C. Approve the report since the final price target is what matters, not the intermediate rate.
• D. Require the analyst to reconcile the discount rate used in the calculation with the rate disclosed in the narrative so the two are consistent and accurate.

27. A supervisory analyst reviewing a currency-sensitive report on a foreign issuer notices that the analyst converted historical financial results to U.S. dollars using inconsistent exchange rates across different periods shown in the same table. What should be required?

• A. Apply a consistent and clearly disclosed currency conversion methodology across all periods presented.
• B. Use whichever exchange rate makes the trend look most favorable.
• C. Remove the historical data and show only the most recent period.
• D. Present all figures only in the foreign currency to avoid conversion issues.

28. A report's summary section states a company's debt-to-equity ratio has "improved substantially," but the balance sheet data included later in the same report shows total debt increased year-over-year while equity was roughly flat. What is the concern?

• A. The report needs additional charts to illustrate the trend.
• B. The balance sheet data should be moved earlier in the report.
• C. The summary section is too brief compared to firm standards.
• D. The summary's conclusion is inconsistent with the underlying data presented in the report and must be reconciled or corrected.

29. Verifying the accuracy, consistency, and sourcing of data in a research report primarily protects against:

• A. Investors relying on numbers, calculations, or sources that are wrong, inconsistent, or unsupported.
• B. The firm's need to minimize the number of pages in each report.
• C. Competing firms copying the report's conclusions.
• D. The analyst receiving credit for original research ideas.

30. An analyst's report estimates a bond's yield to maturity but the supervisory analyst notices the calculation did not account for the bond trading at a significant discount to par. What is the concern?

• A. Whether the analyst used annual or semiannual compounding conventions consistently.
• B. Whether the bond's coupon rate was disclosed in the report.
• C. Whether the yield calculation properly reflects the price discount, since ignoring it would understate the bond's true yield to maturity.
• D. Whether the credit rating agency has reviewed the bond recently.

31. A supervisory analyst notices that a report's historical stock price chart uses closing prices, but the accompanying return calculation in the text appears to use intraday high prices, producing a return figure inconsistent with the chart. What should be done?

• A. Add a footnote acknowledging that the two figures were calculated differently, without changing either one.
• B. Remove the return calculation and leave only the chart.
• C. Ensure the return calculation and the chart use the same, clearly identified price basis so the figures are consistent with each other.
• D. Leave both as is since charts and calculations often use different conventions.

32. A report includes a table of peer companies' EBITDA margins sourced from company filings, but the supervisory analyst finds that one peer's figure in the table reflects an adjusted (non-GAAP) EBITDA while the rest reflect unadjusted figures, with no disclosure of the difference. What is required?

• A. Remove EBITDA margins from the table for all companies to avoid the issue.
• B. Approve the table since EBITDA is a widely used metric regardless of adjustments.
• C. Replace the adjusted figure with the analyst's own estimate of what it would be if unadjusted, without disclosure.
• D. Disclose the basis of each figure and ensure the comparison uses a consistent basis, or clearly flag the differing treatment for that peer.

33. A supervisory analyst reviewing a valuation section notes the analyst applied a price-to-earnings multiple to a company that has had negative earnings for the past two years. What should be evaluated?

• A. Whether the multiple was calculated using the current or prior fiscal year.
• B. Whether a different valuation approach, such as one based on revenue or book value, would be more reasonable given the company lacks positive, stable earnings.
• C. Whether competitors use the same multiple in their own reports.
• D. Whether the analyst rounded the multiple to the nearest whole number.

34. A supervisory analyst is evaluating whether an analyst's "sell" rating on a real estate investment trust is reasonably supported. Which valuation approach would be most appropriate to review as the primary basis, given industry practice?

• A. A model based solely on the company's cash balance.
• B. Price-to-earnings ratio based on GAAP net income alone.
• C. Funds from operations (FFO) or a similar REIT-specific cash flow metric, along with comparable REIT valuation multiples.
• D. A price target based only on year-to-date stock price momentum.

35. A supervisory analyst reviews a price target calculated by multiplying a forward earnings-per-share estimate by a target P/E multiple. If the analyst's forward EPS estimate is $4.00 and the target multiple is 15x, what price target results from this calculation?

• A. $19.00, from adding the multiple to the EPS estimate.
• B. $3.75, from dividing the EPS estimate by the multiple.
• C. $11.00, from subtracting the EPS estimate from the multiple times four.
• D. $60.00, from multiplying the forward EPS estimate by the target multiple.

36. When evaluating whether a "reasonable basis" exists for an analyst's rating, a supervisory analyst is primarily assessing whether:

• A. The rating matches the consensus view of other analysts covering the stock.
• B. The analyst's conclusion follows logically from the disclosed data, assumptions, and valuation methodology presented in the report.
• C. The rating was issued before a competitor's report on the same company.
• D. The rating is likely to generate significant trading commissions.

37. An analyst's price target implies the stock should trade at an EV/EBITDA multiple significantly higher than any comparable company in the peer group, with no company-specific justification offered in the report for the premium. What is the supervisory concern?

• A. Whether the analyst rounded the multiple to one decimal place.
• B. Whether the premium multiple is adequately justified by company-specific factors such as superior growth or margins, and if not, whether the target is reasonably supported.
• C. Whether EV/EBITDA is calculated using enterprise value or market capitalization.
• D. Whether the peer group contains at least five companies.

38. A supervisory analyst is assessing whether an analyst's growth estimate for a mature, low-growth utility company is reasonable. The analyst projects 20% annual earnings growth for the next five years with no supporting explanation. What should be required?

• A. Approval, since higher growth estimates make the report more appealing to clients.
• B. A reduction of the growth estimate to exactly match the industry average with no analysis.
• C. Removal of the growth estimate entirely so no number needs to be justified.
• D. A documented, company-specific explanation for why growth would substantially exceed typical patterns for a mature utility, or a revision of the estimate to a supportable level.

39. A supervisory analyst is reviewing a complex report that derives a price target through three different methodologies (DCF, comparable multiples, and a sum-of-the-parts analysis), each producing a materially different result, with the final published target simply set at the highest of the three without explanation. What is the appropriate response?

• A. Approve the report and instruct the analyst to average the three results in future updates only.
• B. Approve the report since providing three methodologies demonstrates thorough analysis regardless of which figure is chosen.
• C. Require the analyst to delete two of the three methodologies so only one remains.
• D. Require the analyst to explain the basis for selecting the final target among the three divergent results, or reconcile the methodologies so the chosen figure is reasonably supported.

40. An analyst recommends a "strong buy" rating based substantially on a single conversation with a company insider describing favorable but non-public future plans, without independent corroborating analysis. What is the reasonable-basis concern?

• A. The insider conversation is sufficient basis as long as it is documented in the analyst's notes.
• B. The rating is fine as long as the insider is not an executive officer.
• C. The rating should be upgraded further given the insider's confidence.
• D. The rating relies on non-public information and lacks independent analytical support, which is both a substantiation and information-integrity problem.

41. A supervisory analyst reviews a report where the price target is based on applying a target multiple to trailing twelve-month earnings, but the narrative describes the target as reflecting the company's expected earnings next year. What issue does this raise?

• A. The multiple used should always be higher when applied to trailing earnings.
• B. The report's font size for the earnings figure needs to be increased.
• C. The narrative's description does not match the actual inputs used in the calculation, creating an inconsistency that must be corrected.
• D. None, since trailing and forward earnings are always numerically identical.

42. An analyst's model assumes a weighted average cost of capital (WACC) lower than the company's estimated cost of debt alone, with no explanation for how this was derived. What should the supervisory analyst require?

• A. Approval, since WACC calculations are highly technical and not subject to review.
• B. Replacement of WACC with the risk-free rate to simplify the model.
• C. An explanation or correction of the WACC calculation, since a weighted average of debt and equity costs cannot reasonably fall below the cost of debt component alone.
• D. Approval, since a lower discount rate simply produces a more conservative valuation.

43. A report values a company using an EV/EBITDA multiple but the supervisory analyst notices the analyst used the company's market capitalization instead of enterprise value in the numerator, without adjusting for debt and cash. What is the effect and required action?

• A. The calculation is fine because EBITDA already accounts for the company's debt.
• B. The multiple is overstated for every company regardless of its capital structure.
• C. The multiple is understated for a company with significant net debt, and the calculation must be corrected to use enterprise value, which reflects both equity value and net debt.
• D. There is no effect, since market capitalization and enterprise value are always equal.

44. An analyst's price target for a pharmaceutical company relies heavily on projected revenue from a drug still in an early clinical trial phase, treating approval and commercial success as certain, with no discussion of the probability of failure common at that stage. What is the reasonable-basis concern?

• A. The concern is limited to whether the drug's chemical name was spelled correctly.
• B. The target is fine because pharmaceutical valuations always include pipeline drugs.
• C. The valuation fails to reasonably account for the substantial risk of clinical or regulatory failure inherent in an early-stage drug candidate.
• D. The target should be increased further to reflect the drug's full commercial potential.

45. A supervisory analyst calculates that an analyst's stated price target implies 40% upside from the current share price, while the report's own risk section describes the company's near-term risks as 'significant and numerous.' What should the supervisory analyst consider?

• A. Whether the risk section should simply be deleted to match the bullish target.
• B. Whether the magnitude of upside implied by the target is reasonably reconciled with the disclosed significant risks, or whether the rating and target need further support or moderation.
• C. Whether the price target should automatically be reduced to remove any upside.
• D. Whether the report's page count is appropriate for the number of risks listed.

46. Before a research report is distributed to the sales force, the supervisory analyst's approval process is primarily designed to ensure that the report:

• A. Complies with applicable regulatory requirements and firm policies governing research content and disclosures.
• B. Contains marketing language likely to generate the most trading commissions.
• C. Matches the personal investment views of firm management.
• D. Avoids any mention of risks that could discourage clients from investing.

47. A supervisory analyst discovers that a report scheduled for publication omits disclosure that the firm makes a market in the subject company's securities. What is the correct course of action?

• A. Hold publication until the required conflict-of-interest disclosure is added to the report.
• B. Publish the report as scheduled since market-making activity is unrelated to research content.
• C. Add a verbal disclosure requirement for the sales desk when discussing the report with clients.
• D. Publish the report and add the disclosure retroactively in the next update.

48. A supervisory analyst maintains a written record of each report's approval decision. What is the primary regulatory purpose served by documenting the specific compliance considerations reviewed for each report?

• A. To create evidence that the required review for disclosure, substantiation, and fairness standards was actually performed before publication.
• B. To provide marketing materials for the sales department.
• C. To give the analyst leverage in salary negotiations.
• D. To reduce the number of reports the department needs to publish each quarter.

49. A supervisory analyst notes that a draft report recommends a bond rated below investment grade without any discussion of default or liquidity risk. What should be required before approval?

• A. A statement that the bond is suitable for all client types.
• B. Approval with no changes since credit ratings are set by rating agencies, not analysts.
• C. Inclusion of a discussion of the material risks associated with the below-investment-grade rating.
• D. Removal of the credit rating information from the report.

50. A research report undergoing supervisory review recommends increasing a position in a thinly traded small-cap stock without mentioning trading liquidity constraints. What is the primary supervisory concern?

• A. Whether the stock's ticker symbol is properly formatted in the report.
• B. Whether the report is too short compared to reports on larger-cap companies.
• C. Whether the analyst's bonus depends on trading volume in the stock.
• D. Whether investors following the recommendation could face difficulty executing trades at reasonable prices given low liquidity.

51. A supervisory analyst must decide whether a proposed research report can rely on the same industry outlook section used in a report published six months earlier. What is the key consideration?

• A. Whether reusing the section saves the analyst preparation time.
• B. Whether the earlier report's section was authored by the same analyst.
• C. Whether the earlier section was well received by clients.
• D. Whether the underlying industry data and conditions remain current and accurate as of the new report's publication date.

52. A trader on the firm's proprietary trading desk asks the research analyst, prior to publication, whether an upcoming report will contain a rating change so the desk can adjust its position. What should the supervisory analyst do?

• A. Allow the disclosure only if the trader promises not to trade until after publication.
• B. Allow the disclosure but require the trader to inform the analyst's manager afterward.
• C. Allow the disclosure since the trading desk is part of the same firm.
• D. Prohibit the disclosure, since pre-release access to unpublished research conclusions by internal trading personnel would create an improper informational advantage.

53. A supervisory analyst's role as liaison between the research department and other internal groups primarily involves:

• A. Approving the marketing department's advertising campaigns unrelated to research.
• B. Negotiating analysts' base salaries with human resources.
• C. Setting the research department's annual budget independently of firm management.
• D. Managing the flow of information and interactions between research analysts and other departments to prevent conflicts of interest and information barrier breaches.

54. A supervisory analyst is checking a report's comparable-company valuation table and notices that one peer company's market capitalization appears outdated by several quarters relative to the other peers listed. What is the appropriate action?

• A. Remove that peer company from the comparison table entirely.
• B. Require the analyst to update the figure to a current, consistent measurement date across all comparable companies before approval.
• C. Add a disclaimer that some data in the table may be outdated.
• D. Approve the report since one outdated figure among several peers is immaterial.

55. While verifying calculations in a research report, a supervisory analyst finds that the reported price-to-earnings ratio does not match what results from dividing the stated share price by the stated earnings-per-share figure in the same report. What should happen?

• A. Remove the earnings-per-share figure so the inconsistency is no longer visible.
• B. Approve the report since minor rounding differences in ratios are always acceptable.
• C. Recalculate and correct the ratio so it is consistent with the share price and earnings figures actually presented in the report.
• D. Replace the ratio with a qualitative description instead of a number.

56. An analyst issues a price target derived primarily from a dividend discount model, but the covered company does not currently pay a dividend and has no stated plans to initiate one. What is the primary concern for the supervisory analyst?

• A. Whether the analyst disclosed the model's formula in a footnote.
• B. Whether the target price is a round number.
• C. Whether the target was set higher or lower than the current share price.
• D. Whether the chosen valuation methodology is appropriate given the company's actual dividend policy and circumstances.

57. An analyst's discounted cash flow model assumes revenue growth of 25% annually in perpetuity beyond the explicit forecast period, well above the company's historical growth or the broader economy's long-term growth rate. What is the supervisory concern?

• A. Whether the analyst disclosed the software version used for the calculation.
• B. Whether the perpetuity growth assumption is unreasonably high and could overstate the terminal value and resulting price target.
• C. Whether the forecast period should be exactly five years.
• D. Whether the analyst used a spreadsheet or the firm's standard valuation software.

58. An analyst issues a "buy" rating on a bank stock and supports the price target using a price-to-book multiple applied to the bank's tangible book value. A supervisory analyst reviewing the reasonable basis for this approach should recognize that:

• A. Tangible book value is irrelevant to bank valuation and should be replaced with revenue multiples.
• B. Price-to-book multiples are a commonly accepted valuation approach for banks because their assets and liabilities are largely financial instruments closely tied to book value.
• C. Price-to-book multiples should never be used for any financial company.
• D. The multiple must equal exactly 1.0 for the valuation to be considered reasonable.

59. An analyst's sum-of-the-parts valuation adds together separate value estimates for a conglomerate's three business segments but does not include any adjustment for corporate-level debt or unallocated corporate expenses. What should the supervisory analyst require?

• A. Removal of one segment to simplify the analysis.
• B. Approval as is, since each segment's value was individually calculated correctly.
• C. An adjustment for net corporate debt and other unallocated items so the sum-of-the-parts figure reasonably reflects total equity value.
• D. A footnote stating that corporate items were intentionally excluded for simplicity.

60. A supervisory analyst reviews a report recommending a covered call options strategy on a stock the firm rates "hold." The report states the strategy's maximum gain is unlimited. Is this description accurate?

• A. Yes, because selling a call option always increases the position's total possible profit above simply owning the stock.
• B. No, because covered calls have unlimited risk rather than unlimited gain.
• C. Yes, because owning the underlying stock provides unlimited upside potential.
• D. No, because a covered call's maximum gain is capped at the strike price minus the stock's purchase price, plus the premium received.

61. Confirming that a 'reasonable basis' exists for an analyst's price target most directly requires the supervisory analyst to check that:

• A. The target matches the average of published targets from other firms.
• B. The valuation inputs, assumptions, and methodology disclosed in the report logically produce the stated target.
• C. The target price ends in a round number for client readability.
• D. The target is higher than the current stock price for every "buy"-rated stock.