Many candidates struggle with the Series 86 & 87 (FINRA) because it focuses heavily on decision-making rather than simple recall. This practice test helps bridge that gap by giving you questions that reflect real exam scenarios. As you go through each section, pay attention to how questions are structured and what they are really asking. Over time, this will improve both your speed and accuracy. Consistent practice combined with review is the key to achieving a strong score.
Updated for 2026: This guide provides a structured approach to help you prepare effectively, understand key concepts, and practice real exam-level questions.
How to Use This Practice Test
- Start by reviewing key concepts before attempting questions
- Take the test in a timed environment
- Analyze your mistakes and revisit weak areas
Why This Practice Test Matters
This practice test is designed to simulate the real exam environment and help you identify knowledge gaps, improve accuracy, and build confidence.
| Exam Name | Series 86 & 87 – Research Analyst Practice Exam (2026 Updated) |
|---|---|
| Exam Provider | Financial Industry Regulatory Authority (FINRA) |
| Certification Type | Research Analyst License (Equity Research, Financial Analysis & Compliance) |
| Total Practice Questions | 120 Advanced MCQs (Valuation + Financial Analysis + Accounting + Ethics) |
| Exam Structure | • Series 86: Quantitative Analysis & Valuation (DCF, Ratios, Financial Modeling) • Series 87: Regulations, Ethics & Research Standards |
| Exam Domains Covered | • Financial Statement Analysis (Income Statement, Balance Sheet, Cash Flow) • Valuation Methods (DCF, Comparable Analysis, Precedent Transactions) • Accounting Principles & Adjustments (Revenue Recognition, Depreciation, Inventory) • Financial Modeling & Forecasting • Macroeconomic & Industry Analysis • Research Ethics, Compliance & Conflict of Interest Rules |
| Questions in Real Exam | • Series 86: ~100 Questions (Analytical + Calculation Heavy) • Series 87: ~50 Questions (Regulations & Ethics) • Mix of quantitative problems and conceptual questions |
| Exam Duration | • Series 86: ~4.5 Hours • Series 87: ~1.5 Hours • Requires strong time management and calculation speed |
| Passing Score | • Typically around 70%–73% • Must pass both exams separately • Strong analytical accuracy required |
| Question Format | • Multiple Choice Questions (MCQs) • Calculation-Based Problems (DCF, WACC, Ratios) • Scenario-Based Financial Analysis • Ethics and compliance case questions |
| Difficulty Level | Advanced (Heavy Calculations + Accounting + Valuation Concepts) |
| Key Focus Areas | • DCF modeling and discount rate (WACC) sensitivity • Financial ratios (ROE, ROA, Debt/EBITDA, Current Ratio) • Earnings quality and cash flow analysis • Accounting methods (FIFO vs LIFO, depreciation impact) • Free cash flow calculations (FCFF vs FCFE) • CAPM and cost of equity calculations • Research independence and conflict disclosures |
| Common Exam Traps | • Confusing FCFF vs FCFE adjustments • Misinterpreting WACC and discount rates • Ignoring working capital changes in cash flow • Misreading accounting impacts (LIFO vs FIFO, depreciation) • Overlooking earnings manipulation signals • Mixing liquidity vs profitability ratios • Failing to identify conflicts of interest in research reports |
| Skills Developed | • Financial modeling and valuation expertise • Advanced accounting analysis and adjustments • Equity research and report writing skills • Macroeconomic and industry analysis • Ethical decision-making and regulatory compliance • Critical thinking and analytical reasoning |
| Study Strategy | • Focus heavily on DCF, WACC, and financial modeling • Practice calculation-based questions daily • Master accounting adjustments and their impact • Learn ratio interpretation deeply • Review ethics and compliance rules thoroughly • Take full-length timed mock exams • Analyze mistakes to strengthen weak areas |
| Best For | • Equity research analysts and associates • Financial analysts and investment professionals • Individuals pursuing research roles in investment banks • Professionals focusing on valuation and financial modeling |
| Career Benefits | • Required license for publishing research reports • Opens roles in equity research and financial analysis • Enhances valuation and modeling expertise • Builds credibility in investment research and advisory roles |
| Updated | 2026 Latest Version – Based on Current FINRA Guidelines |
1.
Which valuation method relies most on future projections?
A. Comparable analysis
B. Precedent transactions
C. Discounted Cash Flow
D. Book value
Answer: C
Rationale: DCF relies on forecasting future cash flows and discounting them to present value. Because it depends heavily on assumptions about growth, margins, and discount rates, it is considered more theoretical than market-based valuation methods.
2.
Which ratio measures profitability relative to shareholder equity?
A. ROA
B. ROE
C. EBITDA margin
D. Current ratio
Answer: B
Rationale: Return on Equity (ROE) measures how efficiently a company generates profits using shareholders’ equity, making it a key metric for evaluating financial performance.
3.
Which is a key duty of a research analyst?
A. Execute trades
B. Provide unbiased research
C. Underwrite securities
D. Manage portfolios
Answer: B
Rationale: Research analysts must provide objective and independent analysis. Conflicts of interest must be disclosed to maintain credibility and regulatory compliance.
4.
Which statement about earnings quality is correct?
A. High earnings always mean strong cash flow
B. Earnings can be manipulated
C. Earnings are always reliable
D. Earnings ignore accounting
Answer: B
Rationale: Earnings can be affected by accounting methods and estimates, so analysts must assess quality by comparing earnings with cash flow and identifying non-recurring items.
5.
Which metric is most relevant in equity research valuation?
A. Debt ratio
B. P/E ratio
C. Dividend yield
D. Book value
Answer: B
Rationale: P/E ratio is widely used in equity research to compare valuation across companies, reflecting how much investors are willing to pay for earnings.
6.
Which is a leading economic indicator?
A. GDP
B. Unemployment
C. Stock market
D. CPI
Answer: C
Rationale: The stock market reflects investor expectations of future economic performance, making it a leading indicator.
7.
Which is NOT a component of free cash flow?
A. Net income
B. Depreciation
C. Capital expenditures
D. Dividends
Answer: D
Rationale: Dividends are financing activities, not part of free cash flow calculations.
8.
Which financial statement shows company profitability?
A. Balance sheet
B. Income statement
C. Cash flow statement
D. Equity statement
Answer: B
Rationale: The income statement reports revenues and expenses, showing net income.
9.
Which risk affects all companies?
A. Business risk
B. Market risk
C. Credit risk
D. Liquidity risk
Answer: B
Rationale: Market risk is systematic and cannot be diversified away.
10.
Which is a conflict of interest for analysts?
A. Independent research
B. Investment banking relationships
C. Public disclosures
D. Market analysis
Answer: B
Rationale: Analysts must disclose relationships with investment banking to avoid bias.
11.
Which ratio measures liquidity?
A. P/E
B. Current ratio
C. ROE
D. Beta
Answer: B
Rationale: The current ratio assesses a company’s ability to meet short-term obligations.
12.
Which is most relevant in cost of equity calculation?
A. CAPM
B. WACC
C. EBITDA
D. EPS
Answer: A
Rationale: CAPM estimates cost of equity based on risk-free rate, beta, and market return.
13.
Which is NOT a valuation method?
A. DCF
B. Comparable analysis
C. Precedent transactions
D. Balance sheet
Answer: D
Rationale: Balance sheet is not a valuation method.
14.
Which is a key ethical requirement?
A. Bias
B. Transparency
C. Profit maximization
D. Secrecy
Answer: B
Rationale: Transparency ensures credibility and compliance.
15.
Which is EBITDA?
A. Earnings before interest, taxes, depreciation, amortization
B. Net income
C. Revenue
D. Cash flow
Answer: A
Rationale: EBITDA reflects operating performance excluding financing and accounting effects.
16.
Which is a lagging indicator?
A. Stock market
B. GDP
C. Unemployment
D. New orders
Answer: C
Rationale: Unemployment reacts after economic changes.
17.
Which is most volatile?
A. Treasury
B. Blue-chip
C. Small-cap
D. Bond
Answer: C
Rationale: Small-cap stocks have higher volatility.
18.
Which is NOT a financial ratio?
A. ROE
B. P/E
C. GDP
D. Current ratio
Answer: C
Rationale: GDP is an economic measure.
19.
Which is most relevant in research reports?
A. Bias
B. Objectivity
C. Marketing
D. Sales
Answer: B
Rationale: Reports must be unbiased.
20.
Which affects stock valuation?
A. Earnings growth
B. Weather
C. Random events
D. Luck
Answer: A
Rationale: Earnings growth drives valuation.
21.
Which is a macroeconomic factor?
A. Company earnings
B. Interest rates
C. Product sales
D. Management
Answer: B
Rationale: Interest rates impact the economy broadly.
22.
Which is most relevant in DCF?
A. Discount rate
B. Dividend
C. Debt
D. Assets
Answer: A
Rationale: Discount rate determines present value.
23.
Which is a regulatory requirement?
A. Misleading data
B. Full disclosure
C. Hidden fees
D. Bias
Answer: B
Rationale: Disclosure ensures transparency.
24.
Which is NOT systematic risk?
A. Inflation
B. Interest rates
C. Recession
D. Company failure
Answer: D
Rationale: Company risk is diversifiable.
25.
Which is most relevant in equity valuation?
A. Cash flow
B. Dividend
C. Debt
D. Assets
Answer: A
Rationale: Cash flow drives valuation.
26.
Which is a key research skill?
A. Bias
B. Analysis
C. Marketing
D. Sales
Answer: B
Rationale: Analytical skills are essential.
27.
Which is a benefit of diversification?
A. Eliminates risk
B. Reduces unsystematic risk
C. Guarantees return
D. Avoids taxes
Answer: B
Rationale: Diversification reduces company-specific risk.
28.
Which is most relevant in earnings analysis?
A. Revenue growth
B. Weather
C. Luck
D. Random events
Answer: A
Rationale: Revenue growth indicates performance.
29.
Which is most relevant in research ethics?
A. Profit
B. Objectivity
C. Sales
D. Bias
Answer: B
Rationale: Objectivity ensures credibility.
30.
Which is key in valuation accuracy?
A. Assumptions
B. Guessing
C. Luck
D. Timing
Answer: A
Rationale: Assumptions drive valuation models like DCF, making accuracy critical.
31.
Which item is added back when calculating EBITDA?
A. Taxes
B. Interest
C. Depreciation
D. Dividends
Answer: C
Rationale: EBITDA excludes non-cash expenses like depreciation and amortization to reflect operating performance. These are added back because they do not represent actual cash outflows, allowing analysts to better compare companies across industries.
32.
Which ratio evaluates short-term liquidity?
A. Debt/Equity
B. Current ratio
C. ROE
D. P/E
Answer: B
Rationale: The current ratio compares current assets to current liabilities, indicating a company’s ability to meet short-term obligations. A higher ratio suggests stronger liquidity and lower risk of financial distress in the near term.
33.
Which component is used in CAPM?
A. Dividend yield
B. Beta
C. EBITDA
D. Revenue
Answer: B
Rationale: CAPM calculates cost of equity using beta, risk-free rate, and expected market return. Beta measures the sensitivity of a stock’s returns relative to the market, reflecting systematic risk.
34.
Which accounting method accelerates expense recognition?
A. Straight-line
B. Declining balance
C. FIFO
D. LIFO
Answer: B
Rationale: The declining balance method accelerates depreciation, recognizing higher expenses earlier in an asset’s life. This reduces early-period profits and taxes, impacting reported earnings and valuation metrics.
35.
Which is most relevant in evaluating earnings quality?
A. Net income only
B. Cash flow vs earnings
C. Dividend yield
D. Market cap
Answer: B
Rationale: Comparing earnings to cash flow helps identify manipulation or aggressive accounting. High-quality earnings are supported by strong operating cash flows.
36.
Which is a non-cash expense?
A. Salaries
B. Rent
C. Depreciation
D. Interest
Answer: C
Rationale: Depreciation allocates cost over time but does not involve cash outflow, making it a non-cash expense.
37.
Which ratio measures leverage?
A. Current ratio
B. Debt/Equity
C. ROA
D. P/E
Answer: B
Rationale: Debt/Equity compares borrowed funds to shareholder equity, indicating financial leverage and risk level.
38.
Which is most relevant in revenue recognition analysis?
A. Timing of sales
B. Debt levels
C. Dividend policy
D. Assets
Answer: A
Rationale: Revenue recognition timing affects reported earnings and can be manipulated, making it critical for analysts to evaluate.
39.
Which is a leading indicator?
A. Unemployment
B. GDP
C. Stock market
D. Inflation
Answer: C
Rationale: The stock market anticipates future economic conditions, making it a leading indicator.
40.
Which statement about free cash flow is correct?
A. Includes dividends
B. Excludes CapEx
C. Reflects available cash after investments
D. Equals net income
Answer: C
Rationale: Free cash flow represents cash available after capital expenditures, used for dividends, debt repayment, or reinvestment.
41.
Which is NOT part of WACC?
A. Cost of equity
B. Cost of debt
C. Tax rate
D. Dividend yield
Answer: D
Rationale: WACC combines cost of equity and debt adjusted for taxes. Dividend yield is not a direct input.
42.
Which ratio measures operational efficiency?
A. Asset turnover
B. P/E
C. Beta
D. Yield
Answer: A
Rationale: Asset turnover shows how efficiently a company uses assets to generate revenue.
43.
Which is most relevant in DCF sensitivity analysis?
A. Revenue
B. Discount rate
C. Assets
D. Dividends
Answer: B
Rationale: Small changes in discount rate significantly impact valuation outcomes.
44.
Which is NOT a financial statement?
A. Income statement
B. Balance sheet
C. Cash flow statement
D. Prospectus
Answer: D
Rationale: Prospectus is a disclosure document, not a financial statement.
45.
Which is most relevant in valuation multiples?
A. EBITDA
B. Weather
C. Luck
D. Random events
Answer: A
Rationale: EBITDA is widely used in valuation comparisons across firms.
46.
Which is a lagging indicator?
A. Stock market
B. GDP
C. Unemployment
D. New orders
Answer: C
Rationale: Unemployment reflects past economic activity.
47.
Which is NOT a liquidity ratio?
A. Current ratio
B. Quick ratio
C. Debt ratio
D. Cash ratio
Answer: C
Rationale: Debt ratio measures leverage, not liquidity.
48.
Which is most relevant in equity research reports?
A. Marketing
B. Objectivity
C. Sales
D. Bias
Answer: B
Rationale: Research must be unbiased and transparent.
49.
Which is a key driver of stock price?
A. Earnings growth
B. Weather
C. Luck
D. Random events
Answer: A
Rationale: Earnings growth drives valuation and investor expectations.
50.
Which is most relevant in cost of capital?
A. CAPM
B. Dividend
C. Revenue
D. Assets
Answer: A
Rationale: CAPM is used to estimate cost of equity, a component of cost of capital.
51.
Which is NOT systematic risk?
A. Inflation
B. Interest rates
C. Recession
D. Company failure
Answer: D
Rationale: Company-specific risk can be diversified away.
52.
Which is most relevant in earnings manipulation detection?
A. Cash flow
B. Dividend
C. Debt
D. Assets
Answer: A
Rationale: Cash flow analysis helps detect discrepancies in earnings.
53.
Which is a key assumption in DCF?
A. Growth rate
B. Dividend
C. Debt
D. Assets
Answer: A
Rationale: Growth assumptions significantly impact valuation.
54.
Which is most relevant in analyst ethics?
A. Profit
B. Objectivity
C. Sales
D. Bias
Answer: B
Rationale: Objectivity ensures credibility and compliance.
55.
Which is most relevant in financial modeling?
A. Assumptions
B. Guessing
C. Luck
D. Timing
Answer: A
Rationale: Models rely heavily on assumptions.
56.
Which is most relevant in ROA?
A. Assets
B. Debt
C. Revenue
D. Dividend
Answer: A
Rationale: ROA measures efficiency in using assets.
57.
Which is most relevant in valuation accuracy?
A. Assumptions
B. Guessing
C. Luck
D. Timing
Answer: A
Rationale: Assumptions drive results.
58.
Which is most relevant in liquidity analysis?
A. Current assets
B. Revenue
C. Dividend
D. Debt
Answer: A
Rationale: Liquidity depends on current assets vs liabilities.
59.
Which is most relevant in macro analysis?
A. Interest rates
B. Revenue
C. Assets
D. Dividend
Answer: A
Rationale: Interest rates affect the economy broadly.
60.
Which is key in research credibility?
A. Bias
B. Objectivity
C. Sales
D. Profit
Answer: B
Rationale: Objectivity ensures trust and compliance.
61.
Which adjustment is made to convert net income to operating cash flow?
A. Subtract depreciation
B. Add depreciation
C. Subtract revenue
D. Add dividends
Answer: B
Rationale: Depreciation is a non-cash expense deducted in net income. It is added back when calculating operating cash flow because it reduces accounting profit but does not represent an actual cash outflow.
62.
Which ratio best measures a company’s ability to cover interest payments?
A. Current ratio
B. Debt/Equity
C. Interest coverage ratio
D. ROE
Answer: C
Rationale: The interest coverage ratio (EBIT/interest expense) measures how easily a company can meet interest obligations, indicating financial stability and credit risk.
63.
Which accounting change increases reported earnings in the short term?
A. Accelerated depreciation
B. Straight-line depreciation
C. Increasing reserves
D. Expensing costs early
Answer: B
Rationale: Straight-line depreciation spreads expenses evenly, resulting in lower early-period expenses compared to accelerated methods, thus increasing reported earnings initially.
64.
Which is most sensitive in DCF valuation?
A. Revenue
B. Discount rate
C. Assets
D. Dividends
Answer: B
Rationale: Small changes in the discount rate (WACC) significantly impact valuation, making it one of the most sensitive inputs in DCF models.
65.
Which ratio measures profitability relative to assets?
A. ROE
B. ROA
C. P/E
D. Current ratio
Answer: B
Rationale: Return on Assets (ROA) shows how efficiently a company uses its assets to generate profit, making it a key performance metric in analysis.
66.
Which is a sign of earnings manipulation?
A. Strong cash flow
B. Declining revenue
C. Large gap between earnings and cash flow
D. Stable margins
Answer: C
Rationale: A significant difference between net income and operating cash flow may indicate aggressive accounting practices or manipulation.
67.
Which is most relevant in working capital analysis?
A. Fixed assets
B. Current assets and liabilities
C. Revenue
D. Equity
Answer: B
Rationale: Working capital focuses on short-term assets and liabilities, reflecting liquidity and operational efficiency.
68.
Which is included in free cash flow calculation?
A. Dividends
B. Capital expenditures
C. Equity issuance
D. Interest payments
Answer: B
Rationale: Free cash flow is calculated by subtracting capital expenditures from operating cash flow, reflecting cash available after investments.
69.
Which is a component of WACC?
A. Dividend yield
B. Cost of equity
C. Revenue
D. Assets
Answer: B
Rationale: WACC combines cost of equity and cost of debt, weighted by their proportions in capital structure.
70.
Which accounting method reduces inventory value in inflation?
A. FIFO
B. LIFO
C. Straight-line
D. Declining balance
Answer: B
Rationale: LIFO assumes the most recent (higher-cost) inventory is sold first, increasing cost of goods sold and lowering inventory value during inflation.
71.
Which ratio measures efficiency in using assets?
A. Asset turnover
B. P/E
C. ROE
D. Beta
Answer: A
Rationale: Asset turnover indicates how effectively a company uses assets to generate revenue.
72.
Which is NOT part of financial modeling?
A. Assumptions
B. Forecasting
C. Guessing
D. Scenario analysis
Answer: C
Rationale: Financial modeling relies on structured assumptions and analysis, not guesswork.
73.
Which is most relevant in sensitivity analysis?
A. Key variables
B. Assets
C. Dividends
D. Debt
Answer: A
Rationale: Sensitivity analysis tests how changes in key variables affect outcomes, identifying risk drivers.
74.
Which is a sign of strong liquidity?
A. Low current ratio
B. High current ratio
C. High debt
D. Low assets
Answer: B
Rationale: A higher current ratio indicates better ability to meet short-term obligations.
75.
Which is NOT a profitability ratio?
A. ROE
B. ROA
C. P/E
D. Current ratio
Answer: D
Rationale: Current ratio measures liquidity, not profitability.
76.
Which is most relevant in revenue forecasting?
A. Historical trends
B. Dividend
C. Debt
D. Assets
Answer: A
Rationale: Historical performance helps project future revenue growth.
77.
Which is a macroeconomic factor?
A. Revenue
B. Interest rates
C. Assets
D. Dividend
Answer: B
Rationale: Interest rates impact the overall economy and investment environment.
78.
Which is most relevant in equity valuation?
A. Cash flow
B. Debt
C. Dividend
D. Assets
Answer: A
Rationale: Cash flow drives intrinsic value.
79.
Which is NOT a valuation method?
A. DCF
B. Comparable analysis
C. Precedent transactions
D. Income statement
Answer: D
Rationale: Income statement is not a valuation method.
80.
Which is most relevant in earnings growth?
A. Revenue increase
B. Weather
C. Luck
D. Random events
Answer: A
Rationale: Revenue growth drives earnings expansion.
81.
Which is most relevant in cost of equity?
A. CAPM
B. Dividend
C. Revenue
D. Assets
Answer: A
Rationale: CAPM estimates cost of equity.
82.
Which is most relevant in analyst independence?
A. Bias
B. Objectivity
C. Sales
D. Profit
Answer: B
Rationale: Independence ensures credibility.
83.
Which is NOT systematic risk?
A. Inflation
B. Interest rates
C. Recession
D. Company failure
Answer: D
Rationale: Company-specific risk is diversifiable.
84.
Which is most relevant in valuation assumptions?
A. Growth rate
B. Dividend
C. Debt
D. Assets
Answer: A
Rationale: Growth assumptions significantly impact valuation.
85.
Which is most relevant in financial analysis accuracy?
A. Assumptions
B. Guessing
C. Luck
D. Timing
Answer: A
Rationale: Accurate assumptions drive reliable results.
86.
Which is most relevant in liquidity analysis?
A. Current assets
B. Revenue
C. Dividend
D. Debt
Answer: A
Rationale: Liquidity depends on short-term assets.
87.
Which is most relevant in macro trends?
A. Interest rates
B. Revenue
C. Assets
D. Dividend
Answer: A
Rationale: Interest rates influence economic cycles.
88.
Which is most relevant in earnings quality?
A. Cash flow
B. Dividend
C. Debt
D. Assets
Answer: A
Rationale: Cash flow confirms earnings reliability.
89.
Which is most relevant in research ethics?
A. Profit
B. Objectivity
C. Sales
D. Bias
Answer: B
Rationale: Objectivity is essential for trust.
90.
Which is key in valuation reliability?
A. Assumptions
B. Guessing
C. Luck
D. Timing
Answer: A
Rationale: Assumptions determine valuation outcomes.
91.
A company reports rising net income but declining operating cash flow. This suggests:
A. Strong earnings quality
B. Earnings manipulation risk
C. Improved liquidity
D. Lower expenses
Answer: B
Rationale: When net income rises but operating cash flow declines, it often indicates aggressive accounting practices such as revenue recognition issues or delayed expense recognition. Analysts must investigate accruals and non-cash adjustments to assess true earnings quality.
92.
Which adjustment is required when calculating free cash flow to firm (FCFF)?
A. Subtract interest expense
B. Add back interest expense after tax
C. Subtract dividends
D. Add dividends
Answer: B
Rationale: FCFF represents cash flow available to all capital providers, so interest expense is added back (net of tax) to remove the impact of financing decisions.
93.
Which scenario increases WACC?
A. Lower cost of equity
B. Higher debt ratio with low cost
C. Higher cost of equity
D. Lower tax rate
Answer: C
Rationale: Increasing cost of equity raises the weighted average cost of capital, reducing valuation in DCF models since future cash flows are discounted at a higher rate.
94.
Which accounting change increases short-term cash flow?
A. Increasing inventory
B. Decreasing accounts payable
C. Increasing accounts payable
D. Increasing depreciation
Answer: C
Rationale: Increasing accounts payable delays cash payments, improving short-term operating cash flow.
95.
Which is most relevant in detecting aggressive revenue recognition?
A. Revenue growth
B. Accounts receivable growth
C. Dividend yield
D. Debt ratio
Answer: B
Rationale: Rapid growth in receivables relative to revenue may indicate revenue is being recorded before cash is received, signaling potential manipulation.
96.
Which valuation input has the largest impact on terminal value?
A. Revenue
B. Growth rate
C. Assets
D. Dividends
Answer: B
Rationale: Terminal value often represents a large portion of DCF valuation, and small changes in long-term growth rate can significantly alter results.
97.
Which ratio measures operating efficiency?
A. ROE
B. Asset turnover
C. Current ratio
D. Debt ratio
Answer: B
Rationale: Asset turnover shows how efficiently assets generate revenue, reflecting operational performance.
98.
Which is NOT part of operating cash flow?
A. Net income
B. Depreciation
C. Working capital changes
D. Dividends
Answer: D
Rationale: Dividends are financing activities, not operating cash flows.
99.
Which scenario lowers enterprise value?
A. Lower discount rate
B. Higher growth rate
C. Higher WACC
D. Higher EBITDA
Answer: C
Rationale: A higher discount rate reduces the present value of future cash flows, lowering enterprise value.
100.
Which accounting method increases COGS in inflation?
A. FIFO
B. LIFO
C. Straight-line
D. Declining
Answer: B
Rationale: LIFO uses recent higher-cost inventory, increasing cost of goods sold and reducing reported profits.
101.
Which is most relevant in evaluating leverage risk?
A. Current ratio
B. Debt/EBITDA
C. ROE
D. P/E
Answer: B
Rationale: Debt/EBITDA measures how many years of earnings are needed to repay debt.
102.
Which is most relevant in DCF scenario analysis?
A. Fixed inputs
B. Variable assumptions
C. Dividends
D. Assets
Answer: B
Rationale: Scenario analysis tests how changes in key assumptions impact valuation.
103.
Which is most relevant in research report disclosure?
A. Profit
B. Conflicts of interest
C. Sales
D. Marketing
Answer: B
Rationale: Analysts must disclose conflicts to maintain transparency and comply with regulations.
104.
Which indicates strong earnings quality?
A. High accruals
B. Strong cash flow
C. High debt
D. Low revenue
Answer: B
Rationale: Earnings supported by cash flow are considered high quality.
105.
Which is most relevant in cost of capital?
A. CAPM
B. Dividend
C. Revenue
D. Assets
Answer: A
Rationale: CAPM estimates cost of equity.
106.
Which reduces free cash flow?
A. Higher CapEx
B. Lower taxes
C. Higher depreciation
D. Lower revenue
Answer: A
Rationale: Capital expenditures reduce free cash flow.
107.
Which is most relevant in liquidity analysis?
A. Current assets
B. Revenue
C. Dividend
D. Equity
Answer: A
Rationale: Liquidity depends on current assets relative to liabilities.
108.
Which is NOT a profitability ratio?
A. ROE
B. ROA
C. P/E
D. Current ratio
Answer: D
Rationale: Current ratio measures liquidity.
109.
Which is most relevant in financial modeling sensitivity?
A. Key drivers
B. Assets
C. Debt
D. Dividend
Answer: A
Rationale: Sensitivity focuses on variables like growth and discount rate.
110.
Which is most relevant in macroeconomic analysis?
A. Interest rates
B. Revenue
C. Assets
D. Dividend
Answer: A
Rationale: Interest rates impact valuation and economic growth.
111.
Which is most relevant in valuation reliability?
A. Assumptions
B. Guessing
C. Luck
D. Timing
Answer: A
Rationale: Accurate assumptions ensure reliable valuation.
112.
Which indicates liquidity risk?
A. High current ratio
B. Low current ratio
C. High revenue
D. High equity
Answer: B
Rationale: Low current ratio suggests difficulty meeting obligations.
113.
Which is most relevant in earnings growth?
A. Revenue growth
B. Weather
C. Luck
D. Random events
Answer: A
Rationale: Revenue drives earnings growth.
114.
Which is most relevant in analyst independence?
A. Bias
B. Objectivity
C. Sales
D. Profit
Answer: B
Rationale: Independence ensures unbiased research.
115.
Which is NOT systematic risk?
A. Inflation
B. Interest rates
C. Recession
D. Company failure
Answer: D
Rationale: Company-specific risk is diversifiable.
116.
Which is most relevant in valuation inputs?
A. Growth rate
B. Dividend
C. Debt
D. Assets
Answer: A
Rationale: Growth assumptions significantly impact valuation.
117.
Which improves operating cash flow?
A. Increase inventory
B. Decrease receivables
C. Increase expenses
D. Increase debt
Answer: B
Rationale: Faster collection improves cash flow.
118.
Which is most relevant in cost of equity?
A. CAPM
B. Revenue
C. Dividend
D. Assets
Answer: A
Rationale: CAPM estimates cost of equity.
119.
Which is most relevant in earnings manipulation detection?
A. Cash flow analysis
B. Dividend
C. Debt
D. Assets
Answer: A
Rationale: Cash flow reveals inconsistencies.
120.
Which is key in research credibility?
A. Bias
B. Objectivity
C. Sales
D. Profit
Answer: B
Rationale: Objectivity builds trust and compliance.
Frequently Asked Questions
Does this Series 86 & 87 (FINRA) test reflect real exam difficulty?
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Take the test in a timed setting, review your answers carefully, and focus on improving weak areas after each attempt.
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Is this Series 86 & 87 (FINRA) suitable for beginners?
This practice test is suitable for both beginners and retakers who want to improve their understanding and performance.