Series 86/87 Practice Exam.
Free practice test — 61 verified questions, instant feedback.
Browse all questions & answers
1. A young software company has strong revenue growth but reports negative earnings. Which valuation multiple would an analyst most reasonably rely on?
- A. Dividend yield
- B. Price-to-earnings ratio
- C. EV/Revenue multiple
- D. Book value per share
Show answer & explanation
Answer: C
Because negative earnings make earnings-based multiples meaningless and the company likely pays no dividend, an EV/Revenue multiple lets the analyst compare valuation against a metric that stays positive and meaningful even before profitability is reached; the other measures either divide by a negative or near-zero denominator or ignore the company's growth stage entirely.2. An analyst computing a company's weighted average cost of capital blends which two inputs to reflect its overall financing cost?
- A. Gross margin and operating margin
- B. Dividend yield and earnings yield
- C. Current ratio and quick ratio
- D. Cost of debt and cost of equity weighted by their proportions in the capital structure
Show answer & explanation
Answer: D
WACC combines the after-tax cost of debt and the cost of equity, each weighted by its share of the firm's total capital, because both debt and equity holders require compensation and the blended figure serves as the discount rate applied to projected cash flows; the other pairs listed are profitability or liquidity metrics that do not represent financing costs.3. In a discounted cash flow model, an analyst wants to estimate the value of all cash flows a company generates after the explicit forecast period ends. Which output captures this?
- A. Sensitivity table
- B. Enterprise value
- C. Working capital adjustment
- D. Terminal value
Show answer & explanation
Answer: D
Terminal value represents the present value of all cash flows beyond the explicit projection horizon, typically estimated with a perpetuity growth or exit multiple method; enterprise value is the sum of all forecasted cash flows plus terminal value, and neither working capital adjustments nor sensitivity tables are designed to capture cash flows past the forecast window.4. When selecting a long-term perpetuity growth rate for the terminal value of a mature company, why do analysts typically cap the assumption near long-run economic growth?
- A. To align with the company's dividend payout ratio
- B. Because a rate assumed to persist forever cannot realistically exceed the growth of the broader economy indefinitely
- C. Because it is required to equal the risk-free rate
- D. To match the company's short-term revenue growth guidance
Show answer & explanation
Answer: B
A perpetuity growth assumption compounds forever, so a rate higher than sustainable long-run economic growth would imply the company eventually becomes larger than the entire economy, an unrealistic outcome; matching short-term guidance, payout ratios, or the risk-free rate are unrelated constraints on a perpetual growth assumption.5. A precedent transaction analysis of acquired companies in a sector will typically produce valuation multiples that run higher than trading comparables for the same sector because precedent deals usually include what?
- A. A discount for illiquidity of private shares
- B. A markdown for minority ownership
- C. A control premium paid to acquire the entire company
- D. An adjustment for foreign currency translation
Show answer & explanation
Answer: C
Buyers in M&A transactions typically pay more than the prevailing public market price to gain control of the target and capture synergies, so precedent transaction multiples embed a control premium that trading comparables, which reflect minority-stake pricing, do not; the other listed adjustments are not what drives the systematic multiple gap.6. A diversified holding company operates a stable utility segment and a fast-growing technology segment. Which valuation approach best captures the distinct economics of each business?
- A. Averaging the multiples of the two least similar peers
- B. Applying a single company-wide P/E multiple
- C. Applying only a dividend discount model to the whole company
- D. Sum-of-the-parts valuation, valuing each segment separately and adding the results
Show answer & explanation
Answer: D
Because the utility and technology segments have very different growth rates, risk profiles, and appropriate multiples, valuing them separately with segment-specific assumptions and then summing the results produces a more accurate blended value than forcing one multiple or one valuation method onto the entire company.7. An analyst varies the assumed revenue growth rate and discount rate across a range of plausible values to see how the resulting valuation changes. What is the primary purpose of this exercise?
- A. To calculate the company's historical beta
- B. To identify which assumptions the valuation is most sensitive to
- C. To satisfy a mandatory recordkeeping requirement
- D. To determine the analyst's compensation
Show answer & explanation
Answer: B
Sensitivity analysis shows how much the output valuation moves in response to changes in individual assumptions, helping the analyst and reader understand which inputs carry the most risk and deserve the closest scrutiny, rather than serving a recordkeeping, historical-beta, or compensation purpose.8. A mature utility company pays a large, stable, and predictable dividend each year. Which valuation model is best suited to this company?
- A. Dividend discount model
- B. Real options valuation
- C. Venture capital method
- D. Liquidation valuation
Show answer & explanation
Answer: A
The dividend discount model values a company based on the present value of expected future dividend payments, which works well for firms with stable, predictable payout policies like mature utilities, whereas venture-capital, liquidation, and real-options approaches are designed for early-stage, distressed, or highly uncertain situations respectively.9. In the Capital Asset Pricing Model used to estimate a company's cost of equity, what does the beta coefficient measure?
- A. The company's absolute level of debt
- B. The average analyst price target
- C. The stock's sensitivity to overall market movements
- D. The company's dividend payout ratio
Show answer & explanation
Answer: C
Beta measures how much a stock's returns tend to move relative to the broader market, capturing systematic risk that cannot be diversified away, which is why CAPM uses it to scale the equity risk premium when deriving the cost of equity; it says nothing directly about debt levels, payout policy, or analyst targets.10. An analyst forecasts a retailer's revenue by projecting expected unit sales volume and multiplying by expected average selling price for each product line. What forecasting approach is this?
- A. Regression to historical GDP growth
- B. Peer-multiple extrapolation
- C. Bottom-up forecasting
- D. Top-down forecasting
Show answer & explanation
Answer: C
Building a forecast from granular drivers such as units and price by product line and aggregating upward is a bottom-up approach, which contrasts with top-down forecasting that starts from a macro or industry-level growth rate and allocates it down to the company; the other choices describe unrelated techniques.11. An analyst publishes bull, base, and bear case valuations alongside a single price target. What is the main benefit of presenting all three scenarios?
- A. It replaces the need for a rating
- B. It guarantees the base case will be accurate
- C. It removes the need to disclose any risk factors
- D. It shows readers a range of outcomes tied to different underlying assumptions, illustrating key risks and upside
Show answer & explanation
Answer: D
Presenting bull, base, and bear scenarios lets readers see how the valuation shifts under different assumptions about growth, margins, or multiples, communicating the range of plausible outcomes and the risks driving them, rather than eliminating disclosure obligations or guaranteeing any single outcome.12. Instead of using a perpetuity growth rate, an analyst estimates terminal value by applying an assumed exit EV/EBITDA multiple to the final year of the forecast. What is a key risk of this method?
- A. It eliminates the need to forecast EBITDA
- B. The chosen exit multiple may itself embed unstated long-term growth and risk assumptions that are hard to justify
- C. It always produces a higher terminal value than the perpetuity growth method
- D. It cannot be used for public companies
Show answer & explanation
Answer: B
An exit-multiple approach implicitly bakes in assumptions about how the market will value the company far in the future, and because that multiple is usually drawn from current trading levels, it can be difficult to justify why the same multiple should still apply many years out; it does not eliminate the need to forecast EBITDA nor is it restricted to public companies.13. A company reports a large one-time gain from selling a factory this quarter. When forecasting future earnings, how should an analyst treat this gain?
- A. Include it in every future quarter's forecast
- B. Exclude it from the recurring earnings base since it is unlikely to repeat
- C. Use it to lower the discount rate
- D. Double it to reflect conservatism
Show answer & explanation
Answer: B
A one-time asset sale gain is not part of the company's ongoing operating performance and is unlikely to recur, so including it in the recurring earnings base used for forward estimates would overstate the company's sustainable earning power; the other treatments described do not correct for the non-recurring nature of the item.14. Two analysts model the same cash flows but one uses a discount rate that is too low relative to the company's actual risk. What is the likely effect on the resulting valuation?
- A. The valuation will be understated
- B. The terminal value will disappear entirely
- C. The valuation will be overstated relative to the company's true risk-adjusted value
- D. The valuation will be unaffected by the discount rate
Show answer & explanation
Answer: C
Because a discount rate is used to bring future cash flows back to present value, a rate set too low relative to the company's actual risk fails to adequately penalize distant, riskier cash flows, producing a present value that is too high; the discount rate directly affects both the explicit-period and terminal value components, so neither an understated result nor no effect nor a vanished terminal value follows.15. An analyst covering a cyclical steel producer notices earnings swing dramatically between boom and recession years. How should the analyst best forecast normalized earnings power?
- A. Use only the most recent quarter
- B. Use only the single highest earnings year in the cycle
- C. Ignore historical data entirely and rely solely on management guidance
- D. Average earnings or margins across a full business cycle rather than relying on one peak or trough year
Show answer & explanation
Answer: D
Because cyclical businesses experience earnings that swing well above and below a sustainable trend depending on where the industry sits in its cycle, averaging results across a full cycle produces a more representative estimate of normalized earning power than anchoring on any single peak, trough, or most recent period.16. An analyst sets a price target by triangulating results from a DCF model and a peer comparable-multiples analysis rather than relying on either alone. Why is this considered a stronger practice?
- A. It guarantees the target will be reached within one year
- B. DCF and comparables always produce identical results
- C. Cross-checking two independent methodologies helps identify and correct errors or unrealistic assumptions in either approach
- D. It removes the need to disclose the valuation methodology
Show answer & explanation
Answer: C
Because DCF and relative valuation rely on different inputs and can each be distorted by flawed assumptions, using both as a cross-check helps the analyst catch an output that looks unreasonable under one lens even if it looked fine under the other, improving overall reliability; this practice does not guarantee any future stock-price outcome or remove disclosure obligations.17. A research analyst personally owns shares of the company covered in a report they are about to publish. What must the report generally disclose?
- A. The analyst's financial interest or ownership position in the subject company
- B. Nothing, since personal holdings are private
- C. The names of the analyst's family members
- D. The analyst's total net worth
Show answer & explanation
Answer: A
Because an analyst's personal financial stake in the covered company creates a potential conflict of interest that could color the recommendation, research reports must disclose that ownership interest so readers can weigh the analyst's objectivity for themselves; broader personal financial or family details are not the relevant disclosure.18. Shortly after a company completes its initial public offering, underwriting firms typically observe a period before publishing research coverage on that new issuer. What is the main purpose of this practice?
- A. To avoid publishing promotional research too close to the offering, which could improperly influence the aftermarket
- B. To allow the stock to be delisted if needed
- C. To allow time to calculate the underwriting fee
- D. To comply with a foreign tax filing
Show answer & explanation
Answer: A
Publishing bullish research immediately after an underwriting firm helped bring a company public risks looking like promotional support for the deal rather than independent analysis, so firms typically wait before initiating coverage to preserve the appearance and substance of research independence; the other options describe unrelated administrative or regulatory matters.19. A firm's research reports use a rating scale of 'Outperform,' 'Market Perform,' and 'Underperform.' What must accompany this scale to be useful to investors?
- A. A requirement that all covered companies receive the same rating
- B. A minimum stock price target of zero
- C. A guarantee that ratings will not change for one year
- D. Clear, plain-language definitions of what each rating means
Show answer & explanation
Answer: D
A rating label is only meaningful if investors understand exactly what it signifies, so firms must provide clear definitions explaining the expected relative performance behind terms like 'Outperform,' rather than leaving readers to guess; nothing requires ratings to stay fixed for a year, to be uniform across coverage, or to include an unrelated price floor.20. Before publishing, an analyst shares a factual passage of a draft report with the subject company to confirm accuracy of operational details. What must the analyst avoid doing in this process?
- A. Revealing the rating or price target to the company before publication
- B. Asking the company to confirm a publicly disclosed store count
- C. Verifying a quoted date from a public filing
- D. Correcting a misstated production figure
Show answer & explanation
Answer: A
Fact-checking sections of a draft with the subject company is permitted for objective, verifiable details, but sharing the rating or price target ahead of publication risks giving the company an opportunity to pressure the analyst into a more favorable conclusion, undermining research independence; correcting factual figures or confirming public information is not the concern.21. Before a research report is distributed to clients, it passes through an internal compliance review. What is the main function of this review?
- A. To translate the report into other languages
- B. To rewrite the analyst's investment conclusion
- C. To confirm the report complies with firm policy and applicable regulatory requirements before release
- D. To set the analyst's bonus for the quarter
Show answer & explanation
Answer: C
Compliance review exists to catch disclosure gaps, prohibited content, or policy violations before a report reaches clients, protecting both investors and the firm, rather than to alter the analyst's substantive conclusion, determine compensation, or handle translation.22. A firm discloses in its research reports the percentage of covered companies rated buy, hold, and sell over the past year. What does this disclosure help investors assess?
- A. The firm's total trading volume
- B. Whether the firm's ratings skew disproportionately toward one category, providing context for interpreting a given rating
- C. The firm's office locations
- D. The exact salary of each analyst
Show answer & explanation
Answer: B
If a firm's ratings are overwhelmingly buy-skewed, for example, an investor should weight a favorable rating differently than at a firm with a more balanced distribution, so disclosing the historical spread of ratings gives useful context for interpreting any single recommendation; it does not reveal trading volume, salaries, or office locations.23. An analyst's published price target implies 40% upside, but the analyst's own valuation model, if followed precisely, supports only 10% upside. What is the concern with this report?
- A. The published conclusion is inconsistent with the analyst's underlying supporting analysis
- B. The rating scale used is invalid
- C. The report needs a longer risk section only
- D. The target is too conservative and should be raised further
Show answer & explanation
Answer: A
A research report's conclusions are expected to flow logically from the analyst's own supporting work, so a price target that diverges sharply from what the stated model actually produces raises a red flag about the report's internal consistency and reliability, independent of whether the risk section is long enough or the rating scale is otherwise valid.24. A brokerage firm maintains information barriers, sometimes called 'Chinese walls,' between its research and investment banking departments. What is the primary purpose of this separation?
- A. To prevent nonpublic deal information from improperly influencing research opinions and to protect research independence
- B. To speed up trade execution
- C. To simplify the firm's tax reporting
- D. To reduce office rent costs
Show answer & explanation
Answer: A
Information barriers restrict the flow of material nonpublic deal information from investment banking to research so that analysts' opinions are not compromised by knowledge of pending transactions and so research remains independent from banking pressure, rather than serving a real estate, execution-speed, or tax purpose.25. An analyst upgrades a stock's rating shortly after the firm's investment banking division wins a lucrative advisory mandate with that company. What should this timing prompt within the firm?
- A. No action is needed since ratings and banking are unrelated
- B. An immediate downgrade to offset the appearance issue
- C. Automatic approval since banking success is a positive signal
- D. Heightened compliance scrutiny to confirm the rating change is justified by research merit rather than the banking relationship
Show answer & explanation
Answer: D
A rating change that coincides closely with a new banking mandate raises the appearance that research may be accommodating the firm's business interests rather than reflecting independent analysis, so such timing should trigger extra compliance scrutiny to confirm the change rests on legitimate research grounds; treating the banking win as automatic justification, or ignoring the coincidence, would undermine research integrity.26. A research report includes a disclaimer stating that the analysis does not constitute personalized investment advice tailored to any individual's circumstances. Why do firms include this type of disclaimer?
- A. Because general research reflects the analyst's broad view of a security, not a recommendation suited to any specific investor's individual situation
- B. To reduce the report's page count
- C. To avoid paying for report distribution
- D. To eliminate the need for a rating system
Show answer & explanation
Answer: A
Published research is written for a broad audience and reflects the analyst's general opinion of a security, not an assessment of any one reader's goals, risk tolerance, or financial situation, so the disclaimer clarifies that individualized suitability analysis is a separate matter; it has nothing to do with distribution costs, page length, or eliminating ratings.27. A research report includes a chart comparing the subject company's margins to those of three named peers. What must the analyst ensure about this chart?
- A. That it is placed only in an appendix
- B. That it uses the brightest possible colors
- C. That it excludes the subject company for objectivity
- D. That the data sources and any adjustments are clearly labeled so the comparison is not misleading
Show answer & explanation
Answer: D
A comparative chart is only useful and fair if readers can see where the underlying numbers came from and whether any adjustments were made, since unlabeled or selectively adjusted data could mislead investors about how the subject company actually stacks up against peers; color choice and placement are not the substantive concern.28. A firm's compliance department requires analysts to retain drafts, supporting data, and communications related to a published research report. What is the purpose of this retention requirement?
- A. To help the analyst write faster in the future
- B. To create a record that can support or reconstruct the analysis if the report is later reviewed or questioned
- C. To reduce the firm's need for compliance staff
- D. To allow the firm to bill clients for research time
Show answer & explanation
Answer: B
Retaining drafts and supporting materials creates an auditable trail that regulators or internal compliance can review to confirm the published conclusions were reasonably supported by the underlying work, which matters if a report is later scrutinized; it is not intended for billing, writing speed, or staffing reduction purposes.29. An analyst decides to stop covering a company that has been rated 'Buy' for two years. What should the firm do regarding this change?
- A. Disclose the termination of coverage to investors who relied on the prior rating
- B. Delete all historical reports on the company
- C. Simply stop publishing with no further notice
- D. Automatically convert the last rating to 'Hold' with no notice
Show answer & explanation
Answer: A
Investors who have been relying on an active rating need to know that coverage has ended so they understand the rating is no longer being actively maintained or updated, so firms disclose coverage terminations rather than silently going dark, auto-converting the rating without notice, or purging the historical record.30. An analyst reviews a company's own annual regulatory filing directly rather than relying on a summary written by a financial news outlet. This filing is an example of what type of source?
- A. An unverifiable rumor
- B. An expert network transcript
- C. A primary source
- D. A secondary source
Show answer & explanation
Answer: C
A primary source is original material produced directly by the entity being studied, such as a company's own regulatory filing, while a secondary source is a third party's summary or interpretation of that original material, such as a news article; a filing is neither a rumor nor an expert-network transcript.31. An analyst obtains a surprising statistic about a company's market share from a single blog post. Before including it in a published report, what should the analyst do?
- A. Publish it immediately since it is favorable to the thesis
- B. Remove all other data to avoid contradiction
- C. Attempt to corroborate the figure against independent, more reliable sources before relying on it
- D. Attribute it to the company itself without checking
Show answer & explanation
Answer: C
A single unverified source, especially an informal one like a blog post, carries meaningful risk of being inaccurate or outdated, so a careful analyst cross-checks such figures against independent and more authoritative sources, such as filings or industry data, before including them in published research; publishing unchecked, misattributing the source, or stripping out other data does not address the reliability concern.32. An analyst covering a retail chain visits several stores in different regions to observe foot traffic and inventory levels firsthand. What is this research technique commonly called?
- A. A rating reconciliation
- B. A terminal value adjustment
- C. A proxy statement review
- D. A channel check
Show answer & explanation
Answer: D
Directly observing operations such as store traffic, shelf inventory, or supplier activity is known as a channel check, a primary research technique analysts use to validate or challenge assumptions drawn from public filings and management commentary; a proxy review, rating reconciliation, and terminal value adjustment describe unrelated activities.33. An analyst hears an unconfirmed rumor circulating that a company is about to lose a major customer contract. What is the appropriate way to handle this information before publishing anything about it?
- A. Ignore all future information from that source permanently
- B. Treat it as unverified and seek independent confirmation before relying on it in research
- C. Publish it immediately as confirmed fact
- D. Include it only in a footnote with no caveat
Show answer & explanation
Answer: B
An unconfirmed rumor could be inaccurate or based on a misunderstanding, so publishing it as fact risks materially misleading investors; the responsible approach is to treat it skeptically and seek independent corroboration before it informs any published conclusion, rather than publishing it outright or burying it without any qualification.34. During a quarterly earnings call, management provides forward-looking commentary about expected demand trends that goes beyond what was in the press release. How should an analyst treat this commentary relative to the filed financial statements?
- A. As irrelevant to the research process
- B. As legally binding on the company
- C. As more reliable than the audited financials
- D. As useful supplementary context, but as management's own forward-looking opinion rather than an audited fact
Show answer & explanation
Answer: D
Earnings call commentary can add valuable color on management's outlook, but it represents management's own forward-looking opinion and is not subject to the same audit and verification standards as the filed financial statements, so an analyst should weigh it as useful context rather than as a substitute for or superior to audited data, and should not dismiss it as irrelevant either.35. An analyst uses satellite imagery of parking lots to estimate a retailer's store traffic ahead of an earnings release. How should this alternative data best be used?
- A. As proof of a specific dollar amount of revenue
- B. As the sole basis for a rating change
- C. As one corroborating input alongside fundamental research, not a standalone substitute for verified data
- D. As a complete replacement for the company's reported financial results
Show answer & explanation
Answer: C
Alternative data sources like satellite imagery can offer a useful directional signal that supplements traditional fundamental research, but they carry their own measurement uncertainty and generally cannot precisely translate to exact financial figures, so responsible practice treats them as one corroborating input rather than as a full replacement for verified company-reported data.36. An analyst is comparing two data points: a company's own audited annual report figures and a third-party industry association's estimate of the same company's market share. Which distinction is most important to keep in mind?
- A. The industry estimate is always more accurate
- B. Neither source should ever be used in research
- C. The audited figures carry a higher standard of verification than an outside estimate based on modeling assumptions
- D. They are interchangeable and always agree
Show answer & explanation
Answer: C
Audited financial statements go through a formal verification process, giving them a higher degree of reliability than a third-party estimate that is typically built on modeling assumptions and incomplete data, so an analyst should weigh the two differently rather than assuming they are interchangeable, assuming the outside estimate is superior, or discarding both.37. A firm allows its largest institutional clients to see a research rating change several hours before it is released to all other clients. What problem does this practice create?
- A. It gives favored clients an unfair informational advantage over other clients before the report is generally available
- B. It has no impact on any client
- C. It ensures fair pricing for all investors
- D. It reduces the firm's compliance costs
Show answer & explanation
Answer: A
Selectively giving a subset of clients early access to a rating change lets them trade ahead of everyone else on information that has not yet been made generally available, creating an unfair advantage and undermining the principle that research should be disseminated broadly and simultaneously; it does not promote fair pricing, cut compliance costs, or leave other clients unaffected.38. An analyst learns their own upcoming report will contain a rating upgrade and personally buys shares of the company before the report is published. What is the primary concern with this conduct?
- A. It guarantees the stock will rise
- B. It violates no rules since the analyst wrote the report
- C. It is only a concern if the trade loses money
- D. The analyst is trading ahead of clients on the anticipated market-moving effect of their own unpublished research
Show answer & explanation
Answer: D
Trading personally on the anticipated impact of one's own unpublished research allows the analyst to profit from information before it reaches clients, which is a serious conflict of interest and undermines trust in research independence, regardless of whether the trade ultimately gains or loses money or whether the analyst authored the report.39. An analyst appears on a financial television program and makes verbal comments about a stock that are more bullish than the rating and price target published in the firm's own research report. What is the concern here?
- A. Television appearances are always prohibited for analysts
- B. Public comments inconsistent with the firm's published rating can mislead viewers about the analyst's actual documented view
- C. There is no concern as long as the segment is short
- D. The analyst must always agree with the interviewer
Show answer & explanation
Answer: B
When an analyst's public remarks diverge from what is stated in the firm's own published research, viewers who are unaware of the underlying report may be misled about what the analyst's documented, compliance-reviewed view actually is, undermining the consistency and integrity of the firm's research process; media appearances themselves are not prohibited, and interview length or agreement with the host is not the issue.40. A firm's sales and trading desk requests advance notice of an upcoming rating change so it can prepare talking points for clients before the report becomes public. Why is this request problematic?
- A. It is required by every firm's compliance policy
- B. It would allow the desk to trade or advise clients ahead of the report's general release
- C. It would increase the analyst's workload
- D. It would slow down the firm's order execution
Show answer & explanation
Answer: B
Giving the sales and trading desk advance knowledge of a pending rating change creates the same problem as leaking it to favored clients: it opens the door to trading or positioning ahead of the information becoming generally available, undermining the principle of fair, simultaneous dissemination; the request has nothing to do with execution speed, analyst workload, or a compliance mandate.41. A firm times the release of a new research report so that it becomes available to all subscribed clients through the same distribution system at the same moment. What principle does this practice support?
- A. That only the largest clients see the report first
- B. That no client group receives the information earlier than another, avoiding an unfair trading advantage
- C. That research should reach the widest audience possible over several days
- D. That the report's content can vary by recipient
Show answer & explanation
Answer: B
Simultaneous, broad distribution ensures that no single client or client segment gets a head start on trading based on the report's conclusions, supporting fair access to research; it is the opposite of a staggered multi-day rollout, tiered early access for large clients, or content that changes depending on who receives it.42. A firm distributes the same research report to both retail and institutional clients but through different delivery channels appropriate to each audience. What must remain consistent across both audiences?
- A. The substance of the rating, price target, and underlying analysis
- B. The font size used in each version
- C. The number of pages in the report
- D. The color scheme of the cover page
Show answer & explanation
Answer: A
While the delivery channel or format may reasonably differ between retail and institutional audiences, the substantive investment conclusion, including the rating, price target, and supporting analysis, must remain the same for all recipients so that no audience receives a materially different view of the security; formatting details like font, length, or color are not what matters here.43. An analyst calculates a company's debt divided by its EBITDA to arrive at a leverage ratio of 6.0x, well above the industry average of 2.5x. What does this comparison suggest?
- A. The company carries meaningfully higher financial leverage relative to its peers, which may signal elevated financial risk
- B. The company has no debt outstanding
- C. The company is under-levered relative to peers
- D. EBITDA is irrelevant to leverage analysis
Show answer & explanation
Answer: A
A debt/EBITDA ratio well above the peer average indicates the company has taken on more debt relative to its cash-generating earnings capacity than similar companies, which typically points to elevated financial risk and reduced flexibility, the opposite of being under-levered or debt-free.44. A company has operating income of $50 million and annual interest expense of $10 million. What is its interest coverage ratio, and what does a higher figure generally imply?
- A. 0.2x, implying the company cannot cover its interest expense
- B. 5.0x, implying the company generates ample operating income relative to its interest obligations
- C. 5.0x, implying the company has no operating income
- D. 500x, implying extreme financial distress
Show answer & explanation
Answer: B
Interest coverage is calculated by dividing operating income by interest expense, so $50 million divided by $10 million equals 5.0x, and a higher ratio generally signals the company generates ample earnings to comfortably service its interest obligations, the opposite of financial distress or an inability to pay.45. While reviewing a company's financial statements, an analyst reads the footnotes and finds a disclosure of significant off-balance-sheet lease commitments. Why is reviewing footnotes important in this context?
- A. Footnotes only repeat information already on the income statement
- B. Footnotes can reveal obligations or risks not fully captured on the face of the balance sheet, which affect the true financial picture
- C. Footnotes are purely decorative and rarely contain material information
- D. Footnotes are optional and can be skipped for accuracy
Show answer & explanation
Answer: B
Certain financial commitments and contingent obligations are disclosed in the footnotes rather than as line items on the balance sheet itself, so a careful analyst reads them to understand risks and obligations that would otherwise be missed, rather than treating footnotes as redundant or skippable.46. An analyst notices that a company's accounts receivable have grown 40% year over year while revenue grew only 10%. What might this discrepancy suggest?
- A. The company is collecting cash from customers faster than usual
- B. The company's gross margin has definitely improved
- C. The company has reduced its total debt
- D. Potentially aggressive revenue recognition or slowing collections, both of which warrant closer scrutiny
Show answer & explanation
Answer: D
When receivables grow substantially faster than revenue, it can indicate that the company is recognizing revenue before cash is actually collected, or that customers are taking longer to pay, either of which raises a caution flag worth investigating further, rather than signaling faster collections, reduced debt, or improved margins.47. A company announces it is restating its financial statements from the prior two years due to an accounting error. How should an analyst's prior valuation work involving those periods be treated?
- A. It should be revisited, since historical comparisons and ratios built on the original, now-inaccurate figures may need to be revised
- B. It only affects the company's tax filings
- C. It requires no changes since restatements are purely cosmetic
- D. It should be deleted permanently with no further analysis
Show answer & explanation
Answer: A
A restatement means the previously reported figures were materially inaccurate, so any historical ratios, trend analysis, or comparisons an analyst built using the original numbers may no longer be reliable and should be updated using the corrected figures, rather than being ignored, discarded outright, or treated as a tax-only matter.48. A company reports non-GAAP adjusted earnings that exclude stock-based compensation and restructuring charges, resulting in a figure well above its GAAP net income. What should an analyst do with this non-GAAP figure?
- A. Critically review which items were excluded and whether the adjustments are reasonable before relying on the figure
- B. Accept it uncritically since companies would not report a misleading number
- C. Assume the non-GAAP figure is always fraudulent
- D. Ignore GAAP net income entirely going forward
Show answer & explanation
Answer: A
Non-GAAP measures can provide useful insight but also give management discretion over which items to exclude, so a careful analyst examines each adjustment for reasonableness and reconciles back to GAAP figures rather than accepting the adjusted number automatically, dismissing GAAP entirely, or assuming bad faith without examining the specifics.49. A company reports an operating margin of 35%, far above the 15% average of its closest industry peers, with no clear structural explanation offered. What should an analyst do?
- A. Assume the figure is correct without further review since it is favorable
- B. Disregard margin comparisons entirely going forward
- C. Investigate the drivers of the unusually wide margin gap to confirm it reflects a genuine, sustainable advantage rather than a reporting anomaly
- D. Immediately conclude the peer companies are all inaccurate
Show answer & explanation
Answer: C
An outlier margin relative to close peers could reflect a genuine competitive advantage, but it could also stem from a one-time item, an accounting classification difference, or an error, so the analyst should dig into the underlying drivers before accepting the figure at face value, rather than assuming it is correct, blaming the peer group, or abandoning peer comparison as a tool.50. A company reports strong net income but its free cash flow has been negative for several consecutive quarters. Why might an analyst view this divergence as a warning sign about earnings quality?
- A. Positive net income built on accruals rather than actual cash generation may indicate lower-quality or less sustainable earnings
- B. Negative free cash flow always means the company is committing fraud
- C. Free cash flow is irrelevant to assessing earnings quality
- D. Net income and free cash flow always move identically, so this is impossible
Show answer & explanation
Answer: A
Net income can include non-cash items and accrual-based adjustments, so when a company shows consistent accounting profit but fails to generate actual cash, it raises a question about whether reported earnings truly reflect the underlying cash-generating strength of the business, a legitimate earnings-quality concern that falls short of implying outright fraud.51. A U.S.-based multinational reports 12% revenue growth, but an analyst learns that roughly half of that growth came from favorable foreign currency translation rather than higher unit sales or pricing. Why does this distinction matter?
- A. It has no bearing on forecasting future growth
- B. The underlying operating performance may be weaker than the headline growth figure suggests once currency effects are stripped out
- C. Currency effects are permanent and always continue at the same rate
- D. Currency translation always signals fraudulent reporting
Show answer & explanation
Answer: B
Foreign currency translation can inflate or deflate reported growth in ways that have nothing to do with actual business performance and are not necessarily predictive of future results, so separating currency-driven growth from underlying operating growth gives a truer picture of the company's core performance and a more reliable basis for forecasting.52. A diversified company reports consolidated revenue growth of 8%, but an analyst wants to understand which business segments are driving that growth. What should the analyst review?
- A. Only the consolidated income statement, since segment detail is unnecessary
- B. The company's stock price chart alone
- C. Only the balance sheet, since segments do not affect it
- D. Segment-level disclosures that break down revenue, margin, and growth by individual business unit
Show answer & explanation
Answer: D
Consolidated figures can mask very different performance trends across a diversified company's individual segments, so reviewing segment-level disclosures lets the analyst see which units are actually driving growth or dragging on results, information that a single consolidated figure, the balance sheet alone, or a stock chart cannot provide.53. An analyst observes that a retailer's inventory levels have grown 25% while sales have grown only 5% over the same period. What concern does this raise?
- A. The company has reduced its supplier base
- B. Demand may be weakening relative to production or purchasing, risking future markdowns or write-offs
- C. The company is managing inventory more efficiently than before
- D. The company's cash position is definitely improving
Show answer & explanation
Answer: B
Inventory building up much faster than sales can indicate that products are not selling as expected, which risks future price markdowns or inventory write-offs and typically also pressures near-term cash flow as cash gets tied up in unsold goods, the opposite of efficient inventory management or an improving cash position.54. When building a comparable-companies valuation set, what should an analyst prioritize when choosing peer firms?
- A. Firms with the most analyst coverage
- B. Similar business model, growth profile, and risk characteristics
- C. Firms with the largest market capitalization regardless of industry
- D. Firms headquartered in the same country only
Show answer & explanation
Answer: B
A comparable set is only useful if the peers share economic drivers with the subject company, so similarity in business model, growth trajectory, and risk profile matters most; size, geography, and coverage volume alone do not ensure the peers trade on comparable fundamentals.55. Why might an analyst prefer EV/EBITDA over a price-to-earnings ratio when comparing two companies with very different levels of debt?
- A. EV/EBITDA always produces a lower multiple than P/E
- B. EBITDA already excludes revenue from the comparison
- C. P/E accounts for debt levels automatically
- D. EV/EBITDA is unaffected by differences in capital structure since it uses enterprise value and pre-interest earnings
Show answer & explanation
Answer: D
Enterprise value includes both debt and equity claims while EBITDA is calculated before interest expense, so the ratio neutralizes differences in leverage between companies; P/E, by contrast, is distorted by capital structure because interest expense flows through to net income and only equity value is used in the numerator.56. A research report includes a certification statement in which the analyst attests that the views expressed reflect their own personal opinions about the subject company. What is the primary purpose of this certification?
- A. To satisfy a record-retention deadline
- B. To disclose the firm's trading commissions
- C. To assure readers the analysis reflects the analyst's genuine views rather than being shaped by undisclosed influence
- D. To set the report's price target automatically
Show answer & explanation
Answer: C
A certification that the opinions belong to the analyst personally is meant to give readers confidence that the conclusions were not dictated by, for example, investment banking or corporate pressure, reinforcing the independence and integrity of the research; it does not itself disclose commissions, set a price target, or fulfill a retention deadline.57. A brokerage firm's investment banking division recently completed a merger advisory assignment for a company that the firm's research department now covers. What must the research report disclose?
- A. The personal salary of the deal team
- B. The names of competing banks that did not win the assignment
- C. The firm's investment banking relationship with the subject company
- D. The firm's total assets under management
Show answer & explanation
Answer: C
An investment banking relationship with the covered company represents a material conflict of interest that could bias research coverage in favor of a good client, so it must be disclosed so readers can factor it into how they weigh the report's conclusions; salaries, competitor names, and firm-wide asset totals are not the relevant disclosure.58. An analyst's certification statement also addresses whether the analyst's compensation is tied to specific recommendations or views expressed in the report. What conflict does this address?
- A. The risk that the report is too long
- B. The risk that the stock is thinly traded
- C. The risk that an analyst might be financially incentivized to issue a favorable rating regardless of merit
- D. The risk that trading commissions are too high
Show answer & explanation
Answer: C
If part of an analyst's pay depended directly on issuing a positive rating or specific recommendation, that would create a strong incentive to slant the conclusion regardless of the underlying fundamentals, so certifying that compensation is not tied to specific views helps assure readers the recommendation was not financially engineered; commission levels, report length, and trading liquidity are separate matters.59. An analyst arranges a paid call through an expert network with a former employee of a company under coverage. What must the analyst be careful to avoid during this call?
- A. Discussing the expert's prior job title
- B. Eliciting material nonpublic information about the company
- C. Asking about industry trends in general
- D. Asking about publicly available product pricing
Show answer & explanation
Answer: B
Expert network consultations are permissible research tools, but analysts must steer conversations away from anything the expert may know that constitutes material nonpublic information, since trading or publishing research based on such information would raise serious insider-trading concerns; discussing general trends, public pricing, or the expert's background does not raise the same risk.60. A company reports current assets of $400 million and current liabilities of $200 million. What is its current ratio, and what does it generally indicate?
- A. 200, indicating extreme leverage
- B. 2.0, indicating the company has twice as many current assets as current liabilities to cover short-term obligations
- C. 2.0, indicating the company is insolvent
- D. 0.5, indicating weak short-term liquidity
Show answer & explanation
Answer: B
The current ratio is calculated by dividing current assets by current liabilities, so $400 million divided by $200 million equals 2.0, meaning the company holds twice the current assets needed to cover its current liabilities, generally a sign of adequate short-term liquidity rather than insolvency or leverage.61. An analyst reconciling a company's net income to its cash flow statement notices a large increase in working capital reduced operating cash flow well below net income for the period. What does this reconciliation illustrate?
- A. Net income and operating cash flow are always identical by definition
- B. The company must have made an accounting error
- C. Working capital changes never affect the cash flow statement
- D. Changes in working capital, such as cash tied up in receivables or inventory, can cause reported profit and actual cash generated to diverge significantly
Show answer & explanation
Answer: D
The cash flow statement adjusts net income for non-cash items and changes in working capital, so when receivables or inventory build up, cash gets tied up in the business even as accounting profit is recognized, causing operating cash flow to fall below net income; this is a normal reconciling mechanism, not evidence of an error, and working capital changes are a core driver of that reconciliation.
More in this family
Explore more FINRA Series exams
In the same family
- Securities Industry Essentials (SIE)Practice questions →
- General Securities Representative Exam (Series 7)Practice questions →
- Uniform Securities Agent State Law Exam (Series 63)Practice questions →
- Investment Company and Variable Contracts Products Principal Exam (Series 26)Practice questions →
- Private Securities Offerings Representative Exam (Series 82)Practice questions →
- Financial and Operations Principal Exam (Series 27)Practice questions →
- Investment Company and Variable Contracts Products Representative Exam (Series 6)Practice questions →
- Registered Options Principal Exam (Series 4)Practice questions →
- General Securities Principal Sales Supervisor Module Exam (Series 23)Practice questions →
- General Securities Principal Exam (Series 24)Practice questions →
- Supervisory Analyst Exam (Series 16)Practice questions →
- Direct Participation Programs Representative Exam (Series 22)Practice questions →
2026 statistics
Key facts: Series 86/87 exam
The Series 86/87 is administered by FINRA, with a 73% (Series 86) / 74% (Series 87) result.
This free Series 86/87 practice test has 61 original questions written to FINRA's official content outline, last checked against it on August 9, 2026. Every question shows a worked explanation, and nothing here requires a signup.
As of 2026, the Series 86/87 exam fee is $295 (Series 86 fee; Series 87 is a separate $195 exam fee).
Every free resource for this exam
Get a free Series 86/87 study plan
A week-by-week plan plus new practice questions, straight to your inbox.
Official sources
Every exam fact on this page traces to a primary document published by the body that administers the exam.
- Research Analyst Qualification Examinations (Series 86 and 87) — Content OutlineFINRAfinra.org
- Qualification Exams | FINRA.orgFINRAfinra.org
- Regulatory Notice 23-05: FINRA Revises the Research Analyst (Series 86/87) Exam ProgramFINRAfinra.org
- Series 86 and 87 – Research Analyst Exams | FINRA.orgFINRAfinra.org
Last verified against the official exam content outline:
Frequently asked questions
How many questions does a Series 86/87 practice test need to cover?
The real Series 86 (Part I) has 85 scored multiple-choice questions plus 10 unscored pretest items, for 95 total, while the Series 87 (Part II) has 50 scored questions plus 5 pretest items, for 55 total. A good practice test mirrors those part-level counts rather than combining them.
What score do I need to pass on practice questions before sitting the real exam?
Aim to consistently score above the official passing thresholds: 73% on Series 86 and 74% on Series 87. Building in a buffer above those marks on practice sets gives you room for exam-day nerves and unfamiliar item wording.
Which topics should a Series 86/87 practice test emphasize?
Preparation of Research Reports and Valuation and Forecasting carry the most items on the real content outline, so practice questions should weight those areas heavily, alongside Data Verification and Analysis, Information and Data Collection, and Dissemination and Marketing of Information.
Is this Series 86/87 practice test free and does it require signup?
Yes, you can work through the practice questions on this page without creating an account or paying anything. Use it to gauge readiness before committing to the official exam fees.
How should I use a practice test to prepare for the two-part Series 86/87 format?
Since Series 86 and Series 87 are scored and timed separately, practice each part on its own under its own time limit, 4 hours 30 minutes for Series 86 and 1 hour 45 minutes for Series 87, rather than treating them as one combined session.
Do I need to prepare for the SIE exam alongside Series 86/87 practice?
Yes, FINRA requires candidates to pass the Securities Industry Essentials (SIE) exam as a co-requisite alongside Series 86 and Series 87, so it is worth including SIE review in your overall study plan.