Series 79: Data Analysis

Series 79 Data Analysis questions help you isolate one part of the FINRA outline before returning to a mixed practice test. The questions below are original Securities Prep practice items aligned to this topic and are not copied from any exam sponsor.

Topic snapshot

Sample questions

Question 1

In a firm-commitment IPO, the lead underwriter asks the issuer’s independent registered public accounting firm to deliver a letter at pricing and again at closing that (i) “ticks and ties” selected numbers in the prospectus to the issuer’s accounting records and audited financial statements and (ii) provides negative assurance on whether unaudited interim financial information complies with the applicable accounting basis. Which closing deliverable is being described?

• A. Issuer’s counsel legal opinion
• B. Management representation (officers’) letter to auditors
• C. Auditor comfort letter (bring-down at closing)
• D. 10b-5 negative assurance letter from counsel

Best answer: C

Explanation: A comfort letter is delivered by the issuer’s auditors and can provide tick-and-tie procedures and negative assurance on specified financial information.

The described deliverable is an auditor comfort letter, often provided at pricing and “brought down” at closing. It is used by underwriters to support due diligence by linking prospectus financial information to the issuer’s records and providing limited negative assurance on specified financial information, including interim data.

Comfort letters are diligence-related closing deliverables provided by the issuer’s independent auditors in registered offerings. They typically cover agreed-upon procedures such as “tick-and-tie” of figures in the prospectus to audited financial statements or accounting records, and they may include negative assurance on certain unaudited interim financial information (within the scope auditors are permitted to address). Underwriters commonly request an initial comfort letter at pricing and a bring-down comfort letter at closing to confirm nothing has changed materially in the covered information since the earlier date.

Key takeaway: auditor comfort letters support underwriter due diligence on financial statement-related disclosure, while counsel letters address legal disclosure matters and opinions.

• A legal opinion is delivered by counsel and covers legal matters (e.g., authorization, validity), not tick-and-tie financial procedures.
• A 10b-5/negative assurance letter is typically from counsel and addresses disclosure and material misstatement/omission matters, not auditor procedures on financial data.
• A management representation letter is provided to auditors as part of the audit process and is not the underwriter’s closing diligence deliverable described.

Question 2

You are advising a PE sponsor on sizing debt for a proposed acquisition of a U.S. industrial distributor. LTM net income is $45 million and LTM cash flow from operations is $90 million, driven mainly by a $70 million increase in accounts payable after the company extended vendor terms from 45 to 90 days. Several key vendors have issued notices that terms will revert to 45 days within the next two quarters, and the sponsor wants a sustainable leverage case for next week’s lender meeting. Which action is the best recommendation?

• A. Normalize operating cash flow by reversing the temporary accounts payable build to a historical level and size debt off normalized free cash flow
• B. Increase projected maintenance capex because a large operating cash flow number indicates the company is likely underinvesting
• C. Base the leverage case on EBITDA only, since working-capital changes are timing items and not part of earnings power
• D. Use the reported LTM operating cash flow because it reflects actual cash generation and improves leverage capacity

Best answer: A

Explanation: The accounts payable increase is a non-recurring working-capital source expected to unwind, so debt sizing should use normalized free cash flow.

Working-capital movements can materially distort cash flow versus earnings, especially when driven by supplier term changes. Here, the large increase in accounts payable is a cash source that management expects to unwind when vendors force terms back to normal. The most defensible banking recommendation is to normalize working capital and size leverage off sustainable free cash flow.

In leverage and valuation work, bankers focus on sustainable cash generation, not period-specific working-capital timing benefits. A large accounts payable build increases cash flow from operations, but it is not “earned” cash if it results from stretched vendor terms that are expected to reverse. Because vendors are likely to shorten terms back to 45 days, the payable balance (and the cash benefit) should be treated as temporary.

A practical approach is to:

• Analyze working-capital drivers (DPO, DSO, inventory turns) across periods.
• Estimate a steady-state net working capital level using historical/normalized days.
• Adjust LTM CFO (and therefore FCF) to remove the non-recurring payable build before sizing debt.

Key takeaway: use normalized FCF for lender-facing leverage capacity when working-capital changes are expected to unwind.

• Using reported CFO ignores that the payable build is expected to reverse, overstating sustainable debt capacity.
• Relying on EBITDA alone misses a core cash driver; working capital affects liquidity and debt service.
• Raising maintenance capex is not responsive to the stated issue (a temporary payable-driven cash boost) and is not supported by the facts given.

Question 3

Which expression best defines the cash conversion cycle (CCC) and what it measures?

• A. DSO + DIO − DPO; days cash is tied up in operations
• B. DSO + DPO − DIO; days to collect receivables net of inventory
• C. Current assets ÷ current liabilities; short-term liquidity coverage
• D. DIO + DPO − DSO; days to sell inventory net of collections

Best answer: A

Explanation: CCC is days sales outstanding plus days inventory outstanding minus days payables outstanding, capturing how long cash is invested in the operating cycle.

The cash conversion cycle measures the net number of days a company’s cash is committed to working capital in its operating cycle. It is computed by adding the days to collect receivables and sell inventory, then subtracting the days the company can defer payment to suppliers.

The CCC is a working-capital efficiency metric that focuses on operating cash timing rather than balance-sheet coverage. It captures the net time between paying suppliers and collecting cash from customers:

• Start with how long cash is tied in receivables (DSO).
• Add how long cash is tied in inventory (DIO).
• Subtract the time the firm can “finance” operations by delaying payments (DPO).

A higher CCC generally indicates more cash tied up in operations (slower collections and/or inventory turnover, or faster payments), while a lower CCC generally indicates faster cash recovery or greater supplier financing.

• Swapping DPO to be added instead of subtracted reverses the supplier-financing effect.
• Using DIO + DPO − DSO misstates the operating cycle by netting collections against inventory without correctly treating payables.
• The current ratio is a liquidity coverage ratio, not a cash-timing cycle measure.

Question 4

A buyer is considering two structures to acquire a U.S. public company:

• Structure 1: Launch a cash tender offer directly to shareholders (with customary withdrawal rights and proration mechanics).
• Structure 2: Sign a one-step merger agreement and solicit shareholder approval at a special meeting.

For execution planning, the banking team wants the primary Exchange Act schedule that contains the detailed tender offer terms and procedures (e.g., offer-to-purchase materials, withdrawal rights, proration, and other offer conditions). Which filing should the team rely on?

• A. Form 10-Q
• B. Schedule 14A (proxy statement)
• C. Schedule TO
• D. Form 8-K

Best answer: C

Explanation: Schedule TO is the principal tender offer filing that includes the offer-to-purchase terms, procedures, and related communications.

A cash tender offer requires tender-offer-specific disclosure about how the offer works, including offer terms, conditions, proration, and withdrawal rights. That information is provided in the tender offer schedule filed under the Exchange Act. Proxy materials are instead used for deals requiring a shareholder vote.

The decisive differentiator is whether the acquisition is executed through a tender offer versus a shareholder-vote process. When a bidder (or issuer) conducts a tender offer, the core disclosure package is filed on Schedule TO, which is designed to capture the substantive offer mechanics and the written communications used to solicit tenders (price and consideration, conditions, timing, withdrawal rights, proration/oversubscription treatment, and other procedural terms). By contrast, a one-step merger that requires a shareholder meeting is primarily disclosed through proxy solicitation materials (Schedule 14A). Form 8-K may announce signing or other material events, and Form 10-Q provides periodic financial and MD&A updates, but neither is the primary tender-offer terms document.

• The proxy statement schedule is the main disclosure vehicle for soliciting votes in a merger, not for setting out tender mechanics.
• Form 8-K can disclose signing/announcements, but it does not serve as the comprehensive offer-to-purchase/procedures filing.
• Form 10-Q is a periodic report and generally will not contain the tender offer’s detailed procedural terms.

Question 5

An associate is updating a pro forma debt schedule for a newly closed syndicated term loan. Which statement is most accurate about where to source the final deal terms and fields (e.g., margin, benchmark floor, amortization, covenants) for analysis?

• A. The executed credit agreement (and its schedules/definitions) is the primary source for final binding loan terms; the term sheet is typically a preliminary summary that must be reconciled to the credit agreement at closing.
• B. A bond offering memorandum/prospectus is the primary source for the financial covenants and mandatory prepayment terms of a syndicated term loan.
• C. The issuer’s Form 10-K is the primary source for the final interest rate margin and amortization schedule on a new term loan.
• D. The bank’s syndication “deal wire” is the definitive legal document for covenant testing and events of default on a term loan.

Best answer: A

Explanation: Final, enforceable loan economics and covenant definitions are set in the executed credit agreement, while a term sheet is usually indicative and can change before closing.

For a syndicated loan, the definitive, binding terms needed for modeling and covenant analysis are contained in the executed credit agreement and its defined terms/schedules. A term sheet or marketing materials may summarize expected terms, but they are not the final legal source once the facility closes.

The key workflow is to tie your model inputs to the document that is legally operative for that instrument. For a syndicated term loan, that is the executed credit agreement (including defined terms, pricing provisions, amortization language, mandatory prepayment mechanics, financial covenant definitions, and any schedules). A term sheet/commitment paper is commonly used early to frame expected economics and structure, but it can be revised during syndication and negotiation, so analysts should update fields to the credit agreement at closing. Marketing communications like deal wires are helpful for quick color but are not substitutes for the definitive agreement when extracting covenant test definitions or other binding terms.

• Using a Form 10-K may help with existing debt disclosure, but it does not set the final margin or amortization for a new facility.
• A syndication deal wire is a summary communication and can omit or simplify legal definitions needed for covenant testing.
• A bond offering document/indenture governs bond terms; it is not the governing source for a separate bank term loan’s covenants and prepayment mechanics.

Question 6

A broker-dealer is lead left on an IPO. Two days before pricing, the deal team performs bring-down procedures and receives the issuer’s updated unaudited balance sheet.

Exhibit: Working-capital snapshot (USD in $ millions)

Based on the exhibit, which conclusion and next-step best reflects appropriate business due diligence in a bring-down?

• A. Current ratio improved from 1.50x to 1.24x; no additional follow-up is needed beyond the standard bring-down call
• B. Current ratio fell from 1.50x to 1.11x; conduct targeted bring-down management follow-up on liquidity drivers and update disclosure if needed
• C. Current ratio fell from 1.50x to 1.11x; substitute a site visit for additional bring-down management questions
• D. Current ratio is 0.91x; rely on the auditor comfort letter rather than additional management diligence

Best answer: B

Explanation: A drop to about 1.11x signals tighter liquidity and should trigger focused bring-down questions and disclosure follow-up before pricing.

Bring-down procedures are designed to catch material changes since earlier diligence and confirm the disclosure remains accurate at pricing. Here, the current ratio declines from 240/160 = 1.50x to 210/190 \(\approx 1.11x\), indicating weakened short-term liquidity. The appropriate response is to escalate with focused management follow-up and assess whether offering disclosure needs to be updated before proceeding.

In an offering, business due diligence doesn’t stop after initial management meetings and site visits; bring-down procedures shortly before pricing help the underwriters confirm there hasn’t been a material adverse change or new disclosure issue. A simple liquidity check is the current ratio (current assets divided by current liabilities). Using the bring-down package, liquidity has deteriorated, so the deal team should ask management for the drivers (e.g., collections, inventory build, stretched payables, seasonality), obtain support, and determine whether risk factors/MD&A or use-of-proceeds/liquidity disclosure needs updating and whether timing/size/pricing should be reconsidered. Comfort letters support financial statement comfort but do not replace business diligence on new operating developments. The key is tying the quantitative change to an appropriate bring-down diligence response before pricing.

• The option claiming an improvement to 1.24x miscomputes the December 31 ratio and understates the diligence response.
• The option stating 0.91x uses an incorrect calculation and incorrectly treats the comfort letter as a substitute for business diligence.
• The option suggesting a site visit instead of follow-up questions misunderstands bring-down: you still need targeted management explanations and disclosure assessment.

Question 7

A broker-dealer is advising a public issuer on a confidential sell-side M&A process. Management projections and the draft buyer list are stored in a virtual data room and are clearly marked confidential. To “get market color,” an investment banking analyst emails the projections to an equity sales employee who is not staffed on the deal, has not been wall-crossed, and has client-facing trading conversations.

What is the most likely outcome for the firm?

• A. No material issue because both employees work at the same firm
• B. The issue is cured as long as the sales employee signs an NDA
• C. The firm must immediately publicly disclose the projections to avoid Reg FD
• D. Compliance escalates, restricts the name, and investigates a barrier breach

Best answer: D

Explanation: Sharing MNPI outside a need-to-know group can breach information barriers, prompting restricted-list action and an internal review to prevent misuse.

The emailed projections are MNPI and were shared outside the deal team to a client-facing employee without a need-to-know. That creates a likely information-barrier breach and heightened insider trading/control risk. The most likely consequence is compliance-driven remediation, including restricting the issuer/security and investigating and containing any dissemination or trading impact.

In a confidential M&A mandate, projections and buyer lists are typically MNPI and must be limited to a defined “need-to-know” group subject to information barriers. Sending MNPI to a non-wall-crossed, client-facing sales employee is a control failure because it increases the risk that MNPI could influence customer communications, recommendations, or trading.

Most firms’ high-level response is to:

• Escalate to Compliance/Legal and document the incident
• Place the issuer/security on a restricted list (and/or tighten existing restrictions)
• Preserve evidence and assess whether any trading or further dissemination occurred
• Remediate access controls and wall-cross procedures

The key takeaway is that the primary consequence is internal restriction and investigation to contain MNPI exposure, not treating the information as freely shareable internally.

• The idea that internal sharing is automatically permissible ignores the need-to-know standard and information barriers.
• An NDA with the sales employee does not substitute for wall-crossing controls or remove misuse risk once MNPI is shared.
• Publicly disclosing projections is not an automatic or typical “cure” for an internal MNPI breach in an M&A process.

Question 8

A sponsor is negotiating to buy a U.S. private software company. The buyer’s objective is to sign and close by June 30 to meet fundraising milestones, with minimal purchase price uncertainty. During diligence, the team learns that one customer represents 38% of revenue and the customer contract allows termination upon a change of control unless the customer gives written consent.

Which negotiation issue should matter most to the buyer based on this diligence finding?

• A. Financing certainty risk because the sponsor may not fund
• B. Closing and timing certainty due to required customer consent
• C. Integration risk from combining product roadmaps post-close
• D. Antitrust clearance risk driven by market concentration

Best answer: B

Explanation: The change-of-control consent creates a material third-party closing risk that directly threatens the buyer’s June 30 closing objective.

The diligence finding flags a third-party consent requirement tied to a highly concentrated revenue stream. That creates a significant risk that the deal cannot close on time (or at all) unless the customer cooperates. It is therefore the dominant negotiation tradeoff, often driving closing conditions and price-protection terms.

A key diligence purpose is to surface issues that change the bargaining position and the deal’s execution certainty. Here, the target’s largest customer can terminate on a change of control unless it provides written consent, and that customer represents 38% of revenue—so consent is both economically critical and a gating item for closing.

In negotiations, this typically pushes the buyer to focus on:

• Making customer consent a condition to closing (or requiring it pre-signing)
• Price protection if consent is delayed or denied (escrow/holdback, earnout, or a walk right)
• Specific representations, covenants, and termination rights tied to that customer relationship

The main takeaway is that third-party consent risk directly conflicts with the buyer’s timing and certainty constraints.

• Integration planning is important, but it does not typically determine whether the buyer can close by the stated date.
• Antitrust risk is not suggested by a single-customer change-of-control clause and would usually be driven by competitive overlaps.
• Sponsor funding risk is not indicated by the diligence fact pattern; the new information points to commercial/contractual closing risk.

Question 9

A public company’s PE sponsor is considering an overnight marketed registered secondary offering.

Exhibit: Ownership and trading snapshot (as of May 2025)

• Shares outstanding: 100 million
• Public float (non-affiliate, freely tradable): 60 million
• Sponsor stake: 25 million (plans to sell 12 million)
• 3-month average daily volume (ADV): 1.2 million shares/day
• Top 10 holders (including sponsor): 55% of shares outstanding
• Passive/index holders: ~30% of float
• Short interest: 8% of float

When assessing demand and transaction feasibility, which statement is INCORRECT?

• A. Evaluate holder concentration and passive ownership
• B. Use total shares outstanding to gauge trading liquidity
• C. Compare offering size to float and ADV
• D. Review short interest as a potential demand source

Best answer: B

Explanation: Trading capacity is driven by public float and ADV, not total shares outstanding that include illiquid affiliate holdings.

Feasibility for a follow-on/secondary depends on how much stock is actually available to trade and how actively it trades. Public float and ADV are the relevant measures of absorbable supply, while total shares outstanding can be misleading because it includes concentrated affiliate positions that may not be freely tradable or price-setting. Here, a 12 million share sale is large versus a 60 million float and 1.2 million ADV.

In equity distribution work, ownership and trading data are used to estimate how much incremental supply the market can absorb and what execution risk/discount may be needed. The most relevant liquidity measures are public float and ADV because they reflect the shares that can realistically trade and the market’s normal turnover.

A quick feasibility check typically includes:

• Size the deal versus float (here, 12/60 = 20% of float)
• Size the deal versus ADV (here, 12/1.2 = ~10 days of ADV)
• Review holder concentration and the mix of long-only vs passive vs hedge funds
• Consider short interest as one input to demand, not a guarantee

Total shares outstanding can overstate liquidity when a large portion is held by affiliates or other concentrated holders, so it is not the right basis for absorbability.

• Comparing deal size to float and ADV is a standard absorbability screen for execution risk.
• Holder concentration and passive ownership help frame who can buy incremental supply and how price-sensitive demand may be.
• Short interest can contribute to demand via covering, but it is only a potential source and should be analyzed alongside borrow/positioning.

Question 10

You are on a sell-side pitch and are reviewing the issuer’s latest LTM cash flow bridge (all amounts in USD millions).

Exhibit: LTM operating cash flow bridge (indirect method)

Which interpretation is best supported by the exhibit?

• A. Debt repayment drove the decline in operating cash flow
• B. Capital expenditures were the primary driver of low CFO
• C. The issuer is unprofitable on an accrual basis
• D. Working-capital investment largely consumed operating cash flow

Best answer: D

Explanation: CFO is low mainly due to cash tied up in higher A/R and inventory and a lower A/P balance.

The exhibit reconciles net income to CFO using working-capital line items. Large increases in accounts receivable and inventory are uses of cash, and a decrease in accounts payable is also a use of cash. Those working-capital changes explain why CFO is only $5 million despite $60 million of net income.

Operating cash flow (CFO) under the indirect method starts with net income and adjusts for non-cash items and changes in working capital. In the exhibit, depreciation & amortization adds back $25 million, but working-capital changes are a significant net use of cash: accounts receivable increased (cash not yet collected), inventory increased (cash spent to build stock), and accounts payable decreased (cash paid to suppliers). These uses of cash largely offset earnings, resulting in only $5 million of CFO. The key takeaway is that the exhibit supports a working-capital-driven cash squeeze, not an investing or financing explanation.

• The option pointing to capex confuses investing cash outflows with CFO; capex is not part of the operating bridge shown.
• The option blaming debt repayment misclassifies a financing cash flow item as operating.
• The option claiming accrual unprofitability conflicts with the positive net income in the exhibit.

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