Series 162 Quick Reference

Last revised: June 29, 2026

Compact valuation, ratio, fixed income, equity, and securities-analysis review for FINRA Series 162 candidates.

Exam Use and Scope

Use this Quick Reference as independent review support for the FINRA Series 162 — Supervisory Analyst Qualification Examination (Part II: Valuation of Securities). It focuses on fast recall of valuation tools, financial-statement relationships, security characteristics, and judgment points that a supervisory analyst candidate may need when reviewing securities analysis.

High-yield mindset:

Identify what security is being valued: common stock, preferred stock, bond, convertible, option, warrant, fund, or asset-backed security.
Match the valuation method to the cash-flow claim: equity cash flows, firm cash flows, contractual bond cash flows, option payoffs, or relative market pricing.
Check whether the model uses consistent inputs: nominal vs. real, pre-tax vs. after-tax, levered vs. unlevered, equity value vs. enterprise value.
Watch for research-report plausibility: assumptions, peer group selection, earnings quality, nonrecurring items, conflicts, and unsupported conclusions.

Core Valuation Decision Map

    flowchart TD
	    A[Security or issuer to value] --> B{Contractual cash flows?}
	    B -->|Yes| C[Fixed income / preferred / structured security]
	    B -->|No| D{Operating company equity?}
	    C --> E[Discount coupons, principal, call/put/convertible features]
	    D -->|Yes| F{Stable dividends or cash flows?}
	    D -->|No| G[Option, warrant, fund, commodity-linked, or special situation]
	    F -->|Stable dividends| H[Dividend discount model]
	    F -->|FCF visibility| I[DCF: FCFF or FCFE]
	    F -->|Limited forecast detail| J[Relative valuation multiples]
	    G --> K[Payoff, NAV, replication, or scenario analysis]

Formula Sheet: Core Time Value and Return

Time Value Basics

\[ PV = \frac{FV}{(1+r)^n} \]\[ FV = PV(1+r)^n \]\[ NPV = \sum_{t=1}^{n}\frac{CF_t}{(1+r)^t} - Initial\ Investment \]

Concept	Formula / Rule	Exam trap
Present value	PV = future cash flow discounted at required return	Higher discount rate lowers PV
Future value	FV = present amount compounded forward	Compounding frequency matters if given
Net present value	Sum of discounted cash flows minus initial outlay	Positive NPV means value exceeds cost
Internal rate of return	Discount rate that makes NPV = 0	Multiple sign changes can create multiple IRRs
Holding period return	income plus price change / beginning price	Include both cash income and capital gain/loss
Total return	income return plus capital return	Do not confuse with yield alone
Real return approximation	nominal return - inflation	Exact real return uses ratio, not subtraction
Risk premium	expected return - risk-free rate	Use comparable maturity risk-free rate when specified

Exact real return:

\[ Real\ Return = \frac{1 + Nominal\ Return}{1 + Inflation\ Rate} - 1 \]

Required Return and Cost of Capital

CAPM, WACC, and Growth

\[ Required\ Return = R_f + \beta(R_m - R_f) \]\[ WACC = w_d r_d(1-T) + w_p r_p + w_e r_e \]\[ Sustainable\ Growth = ROE \times Retention\ Ratio \]

Input	Meaning	Use	Common error
Risk-free rate	Return on default-free benchmark	CAPM, discount rate anchor	Using short-term rate for long-duration equity cash flows without reason
Beta	Systematic risk relative to market	CAPM cost of equity	Treating beta as total risk
Market risk premium	Expected market return minus risk-free rate	CAPM	Using market return itself instead of premium
Cost of debt	Yield required by creditors	WACC debt component	Forgetting tax shield if using after-tax WACC
Cost of preferred	Preferred dividend / net price	WACC preferred component	Treating preferred dividends as tax-deductible
Capital weights	Debt, preferred, equity proportions	WACC	Prefer market-value weights when available
Retention ratio	1 - payout ratio	Sustainable growth	Using dividend payout instead of retained earnings share
ROE	Net income / common equity	Growth and profitability	ROE can rise because leverage rises

Valuation Method Selection Matrix

Method	Best for	Key inputs	Strengths	Weaknesses / traps
Dividend discount model	Mature dividend-paying companies	Expected dividends, required return, growth	Direct equity cash-flow model	Poor fit for no-dividend or irregular-dividend firms
Free cash flow to equity	Equity value after debt claims	FCFE, cost of equity	Captures cash available to common equity	Sensitive to leverage and reinvestment assumptions
Free cash flow to firm	Enterprise value	FCFF, WACC, terminal value	Useful when leverage may change	Must subtract net debt to get equity value
Comparable company multiples	Firms with relevant peers	Peer multiples, normalized metrics	Market-based and quick	Peer selection and accounting differences drive results
Precedent transaction multiples	M&A or control valuation	Deal values, control premiums	Reflects transaction pricing	May include synergies and takeover premiums
Sum-of-the-parts	Diversified companies	Segment values, segment multiples	Useful for conglomerates	Segment data may be limited
Asset-based valuation	Asset-heavy, liquidation, holding companies	Fair value of assets and liabilities	Useful floor value	May understate going-concern value
Residual income	Firms with book value relevance	Book value, ROE, cost of equity	Works when dividends are not meaningful	Accounting quality matters
Option pricing / scenario analysis	Embedded optionality, warrants, convertibles	Volatility, time, rates, exercise terms	Captures asymmetric payoffs	Inputs can be subjective

Equity Valuation

Dividend Discount Models

\[ P_0 = \frac{D_1}{r-g} \]

Use the Gordon growth model only when dividends are expected to grow at a stable rate and \(r > g\).

Model	Formula / logic	Best use	Trap
Zero-growth dividend model	Value = dividend / required return	Perpetual level dividend	Assumes no growth forever
Gordon growth	P0 = D1 / (r - g)	Stable-growth dividend payer	Using D0 instead of D1
Multi-stage DDM	PV of forecast dividends plus terminal value	Changing growth phases	Terminal value often drives most of value
H-model	Gradual decline from high to stable growth	Transition growth assumptions	Easy to overstate value with aggressive early growth

High-yield DDM checks:

If growth increases, value increases, all else equal.
If required return increases, value decreases.
If \(g\) approaches \(r\), model output becomes extremely sensitive.
Dividend growth should not exceed economic growth indefinitely without a strong rationale.

Free Cash Flow Models

\[ Firm\ Value = \sum_{t=1}^{n}\frac{FCFF_t}{(1+WACC)^t} + \frac{Terminal\ Value_n}{(1+WACC)^n} \]\[ Equity\ Value = Firm\ Value - Net\ Debt - Preferred\ Stock - Minority\ Interest + Nonoperating\ Assets \]

Cash flow	Plain formula	Discount rate	Value produced
FCFF	EBIT(1 - tax rate) + depreciation and amortization - capex - change in working capital	WACC	Enterprise value
FCFE	Net income + depreciation and amortization - capex - change in working capital + net borrowing	Cost of equity	Equity value
EBITDA	Earnings before interest, taxes, depreciation, amortization	Not a cash-flow valuation by itself	Operating proxy
CFO	Cash flow from operations	Not a full free cash flow if capex omitted	Operating cash generation
FCF	Often CFO - capex	Depends on definition	Must verify definition used

Common FCFF/FCFE traps:

Do not discount FCFF at cost of equity; use WACC.
Do not discount FCFE at WACC; use cost of equity.
Do not subtract interest expense in FCFF if starting from EBIT and using WACC.
Terminal value sensitivity is often the largest risk in a DCF.
Use nominal cash flows with nominal discount rates and real cash flows with real discount rates.

Terminal Value

Terminal approach	Plain formula / logic	Best for	Watch point
Perpetual growth	TV = next-period cash flow / (r - g)	Stable long-term company	Long-term g should be sustainable
Exit multiple	TV = terminal metric x terminal multiple	Market-comparable exit assumption	Multiple must match metric, such as EV/EBITDA
Liquidation value	Sale value of assets minus liabilities	Distress, runoff, asset-based cases	May ignore going-concern value

Relative Equity Valuation Multiples

Multiple	Formula	Best use	Interpretation / trap
P/E	price per share / EPS	Earnings-driven companies	A low P/E may reflect low growth or high risk, not undervaluation
Forward P/E	current price / expected EPS	Forecast-based comparison	Depends heavily on earnings estimates
PEG	P/E / earnings growth rate	Growth-normalized comparison	Growth rate convention must be consistent
P/B	price / book value per share	Banks, insurers, asset-heavy firms	Less useful when intangible assets dominate
P/S	price / sales per share	Low or negative earnings companies	Ignores margins and capital intensity
P/CF	price / cash flow per share	Cash-generative businesses	Cash flow definition must be checked
EV/EBITDA	enterprise value / EBITDA	Capital-structure-neutral comparison	Ignores capex, working capital, and taxes
EV/EBIT	enterprise value / operating income	More depreciation-aware than EBITDA	Accounting depreciation still matters
EV/Sales	enterprise value / sales	Early-stage or cyclical margin recovery	Very sensitive to future margin assumptions
Dividend yield	annual dividend / price	Income stocks	High yield may signal dividend risk

Multiple matching rules:

Numerator	Denominator should be	Example
Equity value or price	Equity metric after debt claims	P/E, P/B, P/CF
Enterprise value	Pre-interest operating metric	EV/EBITDA, EV/EBIT, EV/Sales
Market cap	Common equity value	Price multiples
Firm value	Operating asset cash flow	FCFF-based DCF

Concept	Formula / rule	High-yield point
Basic EPS	net income available to common / weighted average common shares	Uses actual common shares outstanding
Diluted EPS	net income adjusted for dilutive securities / diluted shares	Includes options, warrants, convertibles if dilutive
Net income available to common	net income - preferred dividends	Preferred dividends reduce common EPS
Stock split	Adjust historical shares and per-share data	Total firm value unchanged mechanically
Share repurchase	Fewer shares, often higher EPS	Value depends on price paid and funding
Convertible debt dilution	Add back after-tax interest; add conversion shares	Include only if dilutive
Convertible preferred dilution	Add back preferred dividends; add conversion shares	Include only if dilutive
Options/warrants dilution	Treasury stock method concept	In-the-money instruments can dilute

Exam traps:

EPS growth can come from buybacks, not operating growth.
Dilution can reduce EPS even if net income is unchanged.
Nonrecurring gains can inflate EPS and valuation multiples.
Compare same EPS basis: trailing, forward, normalized, basic, or diluted.

Financial Statement Analysis

Income Statement Quality

Item	Analyst question	Valuation effect
Revenue growth	Volume, price, mix, acquisitions, currency?	Organic growth is usually higher quality than acquisition-only growth
Gross margin	Cost pressure or pricing power?	Margin changes affect forecast earnings and terminal value
SG&A	Fixed-cost leverage or underinvestment?	Expense cuts may temporarily boost earnings
R&D	Expensed investment or discretionary cost?	Cutting R&D may hurt future growth
Depreciation	Economic wear or accounting estimate?	Affects EBIT, net income, and asset values
Interest expense	Financing risk?	Affects net income and coverage ratios
Tax rate	Sustainable or unusual?	Use normalized tax rate for forward valuation
Nonrecurring items	Truly nonrecurring?	Adjust normalized earnings and multiples

Balance Sheet and Cash Flow Statement

Area	What to inspect	Common valuation issue
Cash and equivalents	Operating vs excess cash	Excess cash may be added separately to equity value
Receivables	Growth vs sales growth	Aggressive revenue recognition risk
Inventory	Turnover, obsolescence, method	Inventory buildup may signal demand weakness
PP&E	Age, maintenance capex needs	Underinvestment can overstate free cash flow
Goodwill/intangibles	Acquisition history, impairment risk	Book value may be less meaningful
Debt	Maturity, fixed/floating, covenants	Refinancing and rate risk affect value
Working capital	Changes in receivables, inventory, payables	Can consume cash even when earnings rise
Operating cash flow	Conversion of earnings to cash	Weak CFO relative to net income is a warning
Capital expenditures	Maintenance vs growth capex	FCF depends on sustainable capex assumption

Core Ratios

Category	Ratio	Formula	Interpretation
Liquidity	Current ratio	current assets / current liabilities	Short-term obligation coverage
Liquidity	Quick ratio	cash plus marketable securities plus receivables / current liabilities	Stricter liquidity test
Liquidity	Cash ratio	cash and equivalents / current liabilities	Most conservative liquidity measure
Leverage	Debt-to-equity	total debt / total equity	Financial leverage and equity risk
Leverage	Debt-to-capital	debt / debt plus equity	Capital structure measure
Leverage	Debt-to-EBITDA	debt / EBITDA	Debt burden relative to operating cash proxy
Coverage	Interest coverage	EBIT / interest expense	Ability to pay interest from operating income
Coverage	Fixed-charge coverage	earnings available for fixed charges / fixed charges	Broader than interest-only coverage
Profitability	Gross margin	gross profit / sales	Pricing power and production efficiency
Profitability	Operating margin	operating income / sales	Core operating profitability
Profitability	Net margin	net income / sales	Profit after all expenses
Profitability	ROA	net income / average assets	Asset profitability
Profitability	ROE	net income / average equity	Return to common equity holders
Efficiency	Asset turnover	sales / average assets	Revenue generated per asset dollar
Efficiency	Inventory turnover	cost of goods sold / average inventory	Inventory productivity
Efficiency	Receivables turnover	sales / average receivables	Collection efficiency
Efficiency	Days sales outstanding	365 / receivables turnover	Collection period
Valuation	Earnings yield	EPS / price	Inverse of P/E
Valuation	Book value per share	common equity / common shares	Per-share accounting equity

DuPont ROE

\[ ROE = Net\ Margin \times Asset\ Turnover \times Equity\ Multiplier \]

Driver	Improves ROE when	Risk if overused
Net margin	Company earns more per sales dollar	Margin may be cyclical or temporary
Asset turnover	Assets generate more sales	Asset base may be underinvested
Equity multiplier	More assets financed by liabilities	Higher leverage increases risk

Accounting Adjustments and Comparability

Issue	Effect on reported results	Analyst adjustment / exam point
LIFO vs FIFO	Inventory and COGS differ when prices change	In inflation, LIFO often gives higher COGS and lower income than FIFO
Capitalizing vs expensing	Capitalizing raises current income and assets	Aggressive capitalization can overstate profitability
Depreciation method	Accelerated depreciation lowers early income	Compare firms using different asset lives/methods carefully
Operating leases / lease obligations	Lease commitments may resemble debt	Include lease burden in leverage analysis when relevant
Deferred taxes	Timing differences between book and tax	Not all deferred tax balances reverse soon
Pension assumptions	Discount rate and return assumptions affect expense	Optimistic assumptions can inflate earnings
Goodwill impairment	Noncash charge after acquisition value decline	May signal overpayment or poor acquisition performance
Stock-based compensation	Noncash expense but dilutive	Ignoring it may overstate economic earnings
Restructuring charges	May be recurring in practice	Repeated “one-time” charges deserve skepticism
Acquisition accounting	Purchase price allocation affects depreciation/amortization	Compare organic vs acquired growth

Fixed Income Valuation

Bond Price and Yield Relationships

\[ Bond\ Price = \sum_{t=1}^{n}\frac{Coupon_t}{(1+y)^t} + \frac{Principal}{(1+y)^n} \]

Relationship	Rule
Market yield rises	Existing bond price falls
Market yield falls	Existing bond price rises
Coupon rate equals yield	Bond trades near par
Coupon rate above yield	Bond trades at premium
Coupon rate below yield	Bond trades at discount
Longer maturity	More price sensitivity, all else equal
Lower coupon	More price sensitivity, all else equal
Higher credit risk	Higher required yield, lower price

Yield Measures

Yield measure	Formula / logic	Best use	Trap
Nominal yield	coupon rate on par	Describes stated coupon	Not the investor’s market return unless bought at par
Current yield	annual coupon / market price	Current income approximation	Ignores maturity value and reinvestment
Yield to maturity	IRR if held to maturity and paid as promised	Standard bond return measure	Assumes reinvestment and no default
Yield to call	IRR if called on call date	Callable premium bonds	Often more relevant when call is likely
Yield to worst	Lowest yield among call/maturity scenarios	Conservative callable bond measure	Depends on embedded options
Tax-equivalent yield	tax-exempt yield / (1 - tax rate)	Compare taxable and tax-exempt yields	Use investor’s relevant tax rate if supplied
Real yield	nominal yield adjusted for inflation	Inflation-adjusted return	Use consistent inflation assumption

Duration and Convexity

\[ Approximate\ Price\ Change\ \% \approx -Modified\ Duration \times Yield\ Change \]

Concept	Meaning	Exam point
Macaulay duration	Weighted average time to cash flows	Expressed in years
Modified duration	Price sensitivity to yield change	Higher duration means larger price move
Effective duration	Duration adjusted for embedded options	Useful for callable/putable bonds
Convexity	Curvature of price-yield relationship	Positive convexity helps when rates move significantly
Negative convexity	Price appreciation limited when rates fall	Common in callable and mortgage-backed securities

Duration traps:

Duration is not maturity, though related.
A zero-coupon bond’s duration equals its maturity.
Callable bonds may have shorter effective duration when rates fall.
Price-yield relationship is inverse and nonlinear.

Credit and Structural Features

Feature	Investor effect	Valuation impact
Senior secured debt	Priority claim on specific collateral	Lower required yield than subordinated debt, all else equal
Senior unsecured debt	Priority over subordinated but no specific collateral	Depends on issuer credit quality
Subordinated debt	Lower claim priority	Higher required yield
Callable bond	Issuer can redeem early	Investor faces reinvestment risk; price upside limited
Putable bond	Investor can sell back to issuer	Investor protection; lower yield than comparable nonputable
Sinking fund	Scheduled principal retirement	Can reduce credit risk but create reinvestment risk
Floating-rate note	Coupon resets with reference rate	Lower interest-rate duration than fixed-rate debt
Zero-coupon bond	No periodic coupon, issued at discount	High duration and reinvestment risk is absent before maturity
Inflation-linked bond	Principal/coupon tied to inflation measure	Protects purchasing power, but real-rate risk remains

Preferred Stock, Convertibles, Warrants, and Options

Preferred Stock

Preferred feature	Meaning	Valuation point
Fixed dividend	Stated dividend, often based on par	Value resembles perpetuity if nonmaturing
Cumulative	Missed dividends accrue before common dividends	More protective than noncumulative
Noncumulative	Missed dividends do not accrue	More issuer-friendly
Participating	May share in additional earnings/dividends	Upside feature
Convertible preferred	Can convert into common stock	Value includes income plus conversion option
Callable preferred	Issuer may redeem	Limits upside when rates fall

Perpetual preferred approximation:

\[ Preferred\ Value = \frac{Annual\ Dividend}{Required\ Return} \]

Convertible Securities

Concept	Formula / rule	Meaning
Conversion ratio	par value / conversion price	Shares received upon conversion
Conversion value	stock price x conversion ratio	Value if converted now
Conversion premium	convertible price - conversion value	Extra paid for bond value and option value
Parity price	convertible price / conversion ratio	Stock price at which conversion value equals convertible price
Investment value	value as straight bond or preferred	Downside support if conversion option is out of money

Convertible traps:

Convertibles combine credit risk, interest-rate risk, and equity option exposure.
As stock price rises, convertible behaves more like equity.
As stock price falls, convertible behaves more like a bond, subject to issuer credit quality.
Call features can force conversion if the common stock has appreciated.

Options and Warrants

Position	Payoff at expiration	Risk profile
Long call	max(0, stock price - strike)	Limited loss to premium; upside exposure
Short call	premium minus call payoff	Potentially large loss if uncovered
Long put	max(0, strike - stock price)	Downside protection or bearish exposure
Short put	premium minus put payoff	Obligation to buy at strike; downside risk
Warrant	Long-term right to buy issuer stock	Dilutive if exercised

Option input	Call value effect	Put value effect	Exam point
Stock price rises	Increases	Decreases	Directional exposure
Strike price rises	Decreases	Increases	Exercise terms matter
Volatility rises	Increases	Increases	Optionality benefits from volatility
Time to expiration rises	Usually increases	Usually increases	More time for favorable movement
Interest rates rise	Usually increases	Usually decreases	Cost-of-carry relationship
Dividends rise	Usually decreases	Usually increases	Dividends reduce stock price on ex-date

Greeks quick check:

Greek	Measures	Long call typical sign	Long put typical sign
Delta	Price sensitivity to underlying	Positive	Negative
Gamma	Change in delta	Positive	Positive
Theta	Time decay	Negative	Negative
Vega	Volatility sensitivity	Positive	Positive
Rho	Interest-rate sensitivity	Positive	Negative

Yield Curve, Rates, and Macro Inputs

Indicator	Typical interpretation	Securities-analysis effect
Upward-sloping yield curve	Longer rates above shorter rates	Normal expansion/term premium signal
Flat yield curve	Little difference between short and long rates	Transition or uncertainty signal
Inverted yield curve	Short rates above long rates	Often associated with tighter monetary conditions
Rising inflation expectations	Higher nominal yields	Can pressure equity multiples and bond prices
Falling rates	Higher bond prices, lower discount rates	May support long-duration equities
Strong economic growth	Better revenues and credit conditions	Cyclical sectors may benefit
Weak economic growth	Earnings pressure, credit stress	Defensive sectors may outperform
Strong currency	Hurts exporters’ translated earnings	Helps importers and foreign purchasing power
Commodity price rise	Helps producers, hurts users	Margin impact depends on pass-through ability

Nominal rate decomposition:

\[ Nominal\ Rate \approx Real\ Rate + Expected\ Inflation + Risk\ Premiums \]

Industry and Company Analysis

Industry Life Cycle

Stage	Traits	Valuation emphasis
Introduction	Low profits, high uncertainty	Revenue growth, addressable market, funding
Growth	Rapid sales expansion	Growth sustainability, margins, reinvestment
Maturity	Stable demand and margins	Cash flow, dividends, multiples
Decline	Shrinking demand	Asset value, restructuring, runoff cash flows

Sector Sensitivity

Sector / issuer type	Sensitive to	Analysis focus
Banks	Credit quality, rates, capital, yield curve	Net interest margin, loan losses, book value
Insurers	Underwriting, reserves, investment portfolio	Combined ratio, reserve adequacy, investment yield
Utilities	Rates, regulation, capex, leverage	Dividend stability, allowed returns, debt burden
Industrials	Economic cycle, input costs, orders	Backlog, margins, operating leverage
Technology	Innovation, scale, competition	Growth, retention, R&D, margins
Energy	Commodity prices, reserves, capex	Production, reserve replacement, cash costs
REITs	Rates, occupancy, rent growth	Funds from operations, leverage, property type
Consumer staples	Volume, brand strength, input costs	Pricing power and defensive cash flows
Consumer discretionary	Employment, confidence, credit	Cyclical revenue and margin risk
Healthcare	Pipeline, reimbursement, regulation	Product concentration and R&D outcomes

Funds, Portfolio Measures, and Risk

Concept	Formula / definition	Use
NAV per share	fund assets minus liabilities / shares outstanding	Fund valuation baseline
Total return	distributions plus NAV change / beginning NAV	Fund performance
Standard deviation	Dispersion of returns	Total risk measure
Beta	Market sensitivity	Systematic risk measure
Alpha	Return above expected return for risk	Manager value-added measure
Sharpe ratio	excess return / standard deviation	Return per unit of total risk
Treynor ratio	excess return / beta	Return per unit of systematic risk
Tracking error	volatility of active return	Index-relative risk
Information ratio	active return / tracking error	Active management efficiency

Portfolio traps:

Diversification reduces unsystematic risk, not necessarily systematic risk.
Correlation drives diversification benefit.
Higher return is not better unless adjusted for risk.
Compare manager returns to an appropriate benchmark.

Technical and Market Indicators

Indicator	What it measures	Common interpretation
Moving average	Smoothed price trend	Price above average may suggest uptrend
Relative strength	Performance vs benchmark or peers	Identifies leadership/laggards
RSI	Momentum oscillator	Extreme readings may indicate overbought/oversold conditions
MACD	Trend and momentum	Crossovers may signal trend changes
Advance-decline line	Market breadth	Divergence can warn of weak participation
Volume	Trading activity	Price moves on high volume may carry more significance
Support	Price level where buying may emerge	Break below support can be bearish
Resistance	Price level where selling may emerge	Break above resistance can be bullish

Exam caution: technical indicators are market-analysis tools, not guarantees of intrinsic value.

Supervisory Analyst Review Lens

When reviewing valuation work, ask whether the analysis is internally consistent, supportable, and clearly distinguished from opinion.

Review area	Questions to ask
Recommendation basis	Is the conclusion tied to data, valuation, and assumptions?
Price target	Is the time horizon clear? Is the method identified?
Assumptions	Are growth, margins, discount rates, and multiples supportable?
Peer group	Are peers comparable in business mix, size, growth, margins, and leverage?
Forecasts	Are estimates consistent with industry conditions and company capacity?
Risk disclosure	Are material downside risks identified?
Earnings quality	Are nonrecurring and accounting-driven items adjusted?
Conflicts	Are relevant conflicts handled under the firm’s policies and applicable standards?
Terminology	Are “buy,” “hold,” “sell,” “outperform,” or similar terms defined consistently?
Math	Do per-share values, share counts, enterprise value bridges, and multiples reconcile?

Common Series 162 Valuation Traps

Trap	Correct approach
Using enterprise value with net income	Match enterprise value with pre-interest operating metrics
Using equity value with EBITDA	Use EV/EBITDA, not P/EBITDA, unless explicitly justified
Discounting FCFF at cost of equity	FCFF is discounted at WACC
Discounting FCFE at WACC	FCFE is discounted at cost of equity
Mixing real cash flows with nominal discount rate	Match real with real, nominal with nominal
Treating accounting earnings as cash flow	Adjust for noncash charges, capex, and working capital
Ignoring dilution	Use diluted shares when valuing common equity if dilutive securities matter
Confusing coupon rate and yield	Coupon is stated interest; yield depends on market price
Assuming high dividend yield is safe	High yield may reflect expected dividend cut or price decline
Treating book value as market value	Book value is accounting-based and may differ materially
Ignoring capital structure	Leverage changes risk, EPS, ROE, and valuation
Using trailing multiples for turnaround firms without adjustment	Normalize earnings and margins when justified
Overweighting terminal value	Stress-test terminal growth and exit multiple assumptions
Comparing companies with different accounting policies	Adjust or acknowledge comparability limits
Confusing correlation and causation	Market relationships need economic support

Rapid Calculation Checklist

Before answering a valuation calculation item:

Identify claim type: debt, preferred, common equity, enterprise, option.
Choose correct cash flow: coupon, dividend, FCFF, FCFE, EPS, EBITDA, NAV.
Choose correct discount rate: YTM, required return, cost of equity, WACC.
Check timing: D0 vs D1, beginning vs ending value, annual vs quarterly.
Check units: per share vs total value, percent vs decimal, millions vs shares.
Match numerator and denominator: EV with operating metric, price with equity metric.
Adjust for debt and cash when bridging enterprise value to equity value.
Use diluted shares if per-share equity value is requested and dilution is relevant.
Normalize earnings if the question gives nonrecurring items.
Evaluate reasonableness: sign, direction, premium/discount, and sensitivity.

Practical Next Step

Use this Quick Reference to drill mixed valuation questions: one equity DCF, one relative valuation, one bond price/yield item, one ratio interpretation set, and one supervisory review scenario. Then review every missed question by identifying the mismatched input, formula, or assumption that caused the error.

Scenario Guide

Data and Calculation Review