Series 86 Cheatsheet — Research Analyst Modeling, Valuation & Forecasting

Series 86 is “analyst work under time pressure”: gather the right facts, translate them into a coherent model, pick the right valuation lens, and defend a recommendation with the cleanest logic.

This cheat sheet is a study aid (not legal advice). Always follow your firm’s written supervisory procedures (WSPs) and current FINRA/SEC requirements.

Exam map (where points come from)

Series 86 at a glance (FINRA)

• Items: 85 scored + 10 unscored (95 total)
• Time: 4 hours 30 minutes (270 minutes)
• Passing score: 73

Job functions and weights

Study reality: most misses come from (a) wrong definition (EV vs equity, FCF vs earnings), (b) wrong method selection (P/E vs EV multiple vs DCF), or (c) missing the “driver chain” from macro → industry → company → model.

How Series 86 questions are written (exam mindset)

• Many items are “which is most likely / best supports / most appropriate” decisions.
• The best answer is usually the one that is most defensible: correct definition, consistent assumptions, and the right driver.
• If the stem contains a key constraint (cyclical industry, negative earnings, high leverage, capital intensity, dividend payer), that constraint often determines the correct valuation approach.

Series 86 “best answer” checklist

1. What is the driver chain? macro → industry → company
2. What is the data quality? trend + comparability + accounting method + one-time items
3. What is the model driver? volume/price/mix, margin, capex, working capital, leverage
4. What valuation lens fits? P/E vs EV-based vs DCF vs DDM vs SOTP
5. What’s the catalyst and risk? what changes the market’s mind; what breaks the thesis

Fast eliminations (often wrong on Series 86):

• Mixing EV valuation with equity multiples/metrics (or vice versa).
• Treating cycle-peak earnings or “one-time” items as sustainable.
• Using P/E when earnings are negative or heavily distorted without switching methods.
• Ignoring working capital and capex while focusing only on earnings.
• Using the wrong discount rate for the cash flow (FCFF vs FCFE mismatch).

Definition hygiene (the points you can’t afford to miss)

Research workflow (how real analysis becomes an answer)

• Macro view: what’s happening to growth, inflation, rates, credit, and risk appetite?
• Industry view: what determines demand, pricing power, cost pressure, and regulation?
• Company view: what is the business model, competitive position, and earnings quality?
• Model: turn the thesis into drivers; tie the statements; sanity-check.
• Valuation: pick the correct metric/model; compare to history/peers; build a range.
• Recommendation: identify catalysts, risks, and what would change your mind.

F1 — Macro and industry data collection (high yield)

Macro indicators you must recognize

Series 86 pattern: if a question asks “what macro data matters most?”, choose the metric that directly touches the company’s demand or discount rate.

Fiscal vs monetary policy (concept)

• Fiscal policy: government spending and taxation that affects aggregate demand (high level).
• Monetary policy: central bank actions affecting short-term rates, liquidity, and credit conditions (high level).

Exam pattern: if the question is about discount rates, look to monetary policy / rates / credit spreads. If it’s about demand, look to growth, disposable income, employment, confidence.

Correlation and regression (Series 86 level)

FINRA expects the “what does this prove?” mindset:

• Correlation: variables move together; does not prove causation.
• Regression (concept): estimates relationship between a dependent variable and one or more drivers.

High-level interpretation cues:

• a higher R² means the model explains more of the variation (but doesn’t prove causality).
• coefficient sign tells direction; magnitude tells sensitivity (units matter).
• relationships can change by regime (cycle, rates, competition).

Exam trap: picking “regression proves causation.” It doesn’t.

Industry analysis toolkit (F1 support)

Industry structure and economics

High-yield categories the outline explicitly calls out:

• Market size and growth rate (what can the industry become?).
• Capital intensity (how much reinvestment is required to grow?).
• Products offered and product mix (what drives demand and margins?).
• Pricing flexibility (pricing power vs price-taker).
• Supplier dynamics and the supply curve (input cost pressure and capacity).
• Customer demand (elasticity, substitution, cyclicality).
• Regulatory issues (constraints, barriers, compliance costs).

Trend classification

• Secular trends: long-run shifts (technology, demographics, regulation).
• Cyclical trends: tied to the business cycle (rates, employment, commodity cycle).
• Industry-specific trends: driven by industry events (capacity additions, consolidation, product innovation).

Series 86 pattern: if the stem says “cyclical industry,” expect normalized earnings and cycle-aware multiples.

Competition and positioning (high level)

Questions often test:

• entry/exit risk (new competitors, substitutes, product disruption)
• intra-industry competition (peer positioning)
• inter-industry competition (substitution outside the industry boundary)
• peripheral sector relationships (upstream suppliers, downstream customers)

When in doubt, choose the answer that explains pricing power and margin sustainability.

F2 — Company data verification and fundamental analysis (high yield)

Financial statements: linkages you must be fluent in

Income statement → profitability
Balance sheet → resources and obligations
Cash flow → cash generation and reinvestment

Linkage patterns:

• rising AR can inflate revenue growth while consuming cash
• rising inventory can signal demand risk and consume cash
• rising AP can temporarily boost cash (supplier financing)

Working capital and turnover metrics

Cash conversion cycle (CCC) intuition

CCC = DSO + DIO − DPO (concept)

Series 86 interpretation:

• Lower CCC (faster collections, lean inventory, longer terms) usually supports better cash generation (high level).
• Rising CCC can signal cash strain even when reported earnings look strong.
• Context matters: CCC can rise during growth spurts; the question is whether it’s controlled and reversible.

Growth and profit drivers (what questions look like)

The outline lists common “what drives earnings?” inputs; Series 86 often tests these as root causes:

• management quality and execution
• contract structures
• capex and capacity for growth
• strength of business model
• product assessment and innovation
• customer concentration
• subscriber acquisition costs (where relevant)

If the stem highlights a single driver (e.g., customer concentration), the best answer is usually the one that explains risk to revenue stability and pricing power.

Accounting comparability (high yield)

Series 86 expects you to recognize that accounting choices affect comparability and sometimes valuation.

Common high-level areas:

• Inventory accounting (LIFO vs FIFO): affects COGS and earnings when input costs change (high level).
• Depreciation / amortization policy: affects EBIT/EBITDA comparability (high level).
• Leases: can create debt-like obligations; affects leverage and cash flow presentation (high level).
• Pensions: assumptions and obligations can meaningfully affect earnings quality and balance sheet risk (high level).
• Deferred taxes: can signal timing differences and affect future cash taxes (high level).

Exam trap: treating two companies as directly comparable without adjusting for major accounting method differences.

Adjusted vs GAAP results (what to do with non-GAAP)

• adjusted financials can help comparability (e.g., removing one-time items)
• but “adjustments” can also hide recurring costs

Series 86 pattern: the safest answer recognizes the need to understand the adjustment and its recurrence.

Earnings quality and red flags (high yield)

Series 86 doesn’t test forensic accounting, but it does test “is this result reliable?”

Common exam-level red flags:

• Revenue vs cash mismatch: revenue rising while AR and DSO also rise materially (possible collection risk).
• Inventory build: inventory up faster than sales (demand risk, obsolescence, or channel issues).
• Margin “miracle” without a driver: margins improve but pricing/cost/volume drivers don’t support it.
• Capitalization creep: costs shifted from expense to capex to inflate earnings (high level).
• Repeated “one-time” items: “non-recurring” charges showing up every year.
• Stock-based compensation (SBC): a real economic cost; understand how it affects comparability (high level).

Exam pattern: if asked “what additional info is most important?”, pick the item that tests whether earnings convert to cash.

Leverage and liquidity (high yield)

Series 86 questions often hide risk in the balance sheet. Know the basic lenses:

• Net debt: total debt minus cash (concept; “excess cash” may be treated separately, high level).
• Leverage: Net debt / EBITDA (concept).
• Interest coverage: EBIT / interest expense (concept).
• Liquidity: current/quick ratio concepts and near-term maturities (high level).

Exam pattern: if a company looks “cheap” but has high leverage, the best answer often emphasizes risk premium, refinancing risk, and equity downside convexity.

Corporate actions and comparability

The outline calls out corporate actions as analysis inputs:

• M&A (purchase accounting, synergies, integration risk)
• restructuring (one-time charges vs real savings)
• divestitures and consolidations (segment mix changes)

Exam pattern: if the question asks “why did margins change?”, look for mix, scale, and accounting effects.

Corporate governance (proxy statement mindset)

What governance analysis is trying to detect (high level):

• incentive alignment (compensation)
• related-party concerns
• board oversight and independence signals

Series 86 typically tests governance as a risk and quality signal, not as a legal checklist.

F3 — Forecasting and valuation (high yield)

Forecasting: driver-based modeling mindset

Series 86 is not a spreadsheet exam, but it expects the logic of driver-based forecasting:

• Revenue = volume × price × mix (or units × ARPU, etc.)
• Gross profit = revenue − COGS (margin drivers: pricing, input costs, productivity)
• Operating profit = gross profit − opex (fixed vs variable cost logic)
• Cash flow depends on capex and working capital discipline

Forecast outputs the outline explicitly names

Be ready to forecast or interpret:

• Income statement: sales, gross profit, operating profit
• Cash flow: sources and uses of cash
• Balance sheet: working capital, asset productivity
• Returns: ROA, ROE

Assumptions: what makes a forecast “supported”

The outline emphasizes assumption evaluation. For exam purposes, “supported” usually means:

• anchored to historical trends or peer benchmarks
• consistent with industry cycle / macro backdrop
• consistent across the model (growth, margins, capex, WC all tell the same story)

Multiples and yields (core metric set)

Enterprise value vs equity value (must be automatic)

Series 86 questions often hinge on “which value are we valuing?”

EV = Equity Value + Net Debt + Preferred + Minority Interest − Excess Cash (concept)

Rule of thumb:

• if the multiple uses EBITDA or sales, it’s usually EV-based
• if the multiple uses net income, it’s usually equity-based

Normalized earnings for cyclicals (explicit in outline)

For cyclical industries, Series 86 expects the concept of “mid-cycle” or “trend-line” earnings:

• normalize earnings to avoid valuing a peak/trough as if it’s permanent
• compare normalized metrics to historical mid-cycle multiples (high level)

Cost of capital (high level)

Series 86 doesn’t require deep quant, but you must know what cost of capital represents:

• higher perceived risk → higher required return → lower valuation
• rates and credit spreads affect discount rates

At an exam level, recognize the standard building blocks:

• WACC (concept): WACC = w_e × r_e + w_d × r_d × (1 − T)
• Cost of equity (CAPM concept): r_e = r_f + β × ERP
• Cost of debt (concept): risk-free + credit spread (then tax-affected in WACC)

Key matching rule:

• discount FCFF with WACC
• discount FCFE with cost of equity

DCF (discounted cash flow) basics

Unlevered free cash flow (common concept form):

Unlevered FCF = EBIT × (1 − Tax Rate) + D&A − Capex − ΔNWC

Terminal value (concept):

• perpetuity growth: TV = FCF_(n+1) / (WACC − g)
• exit multiple: TV = EBITDA_n × (Exit multiple)

Series 86 pattern: if asked “what increases value in DCF?”, the answer is usually higher FCF or lower discount rate (all else equal).

DCF workflow (how to think, not how to spreadsheet):

• forecast revenue and margins using drivers
• translate to cash via taxes, capex, and working capital
• discount forecast cash flows + terminal value
• bridge EV → equity value if needed: subtract net debt and other claims (concept)

Common DCF traps:

• choosing a g that is unrealistic or not less than the discount rate (exam-level sanity check)
• using EBITDA as if it were cash flow (ignoring capex and working capital)
• mixing nominal/real assumptions (discount and growth mismatch)
• using a terminal multiple inconsistent with the company’s long-run economics (high level)

Dividend discount model (DDM) basics (explicit in outline)

DDM is most relevant when:

• dividends are stable/predictable
• growth is reasonably estimable (high level)

Exam trap: applying DDM to firms that don’t pay dividends or have unstable payout policy.

Economic profit (explicit in outline)

Concept:

• value is created when ROIC exceeds cost of capital
• “economic profit” is a way to frame value creation beyond accounting earnings (high level)

SOTP / private equity value (explicit in outline)

Sum-of-the-parts (SOTP) logic:

• value segments separately (often with different multiples)
• add up to total value (then adjust for net debt and other claims, high level)

Exam pattern: SOTP is often best when a company has multiple businesses with different economics.

Forecasting future valuation and catalysts (F3 continuation)

Market characteristics (high level)

Know what can move price without changing fundamentals:

• liquidity changes
• risk appetite shifts
• positioning and sentiment
• rate regime changes

Perceived risk drivers (explicit in outline)

Factors that commonly change perceived risk:

• macro: recession risk, inflation, rates
• political/regulatory: policy shifts, enforcement actions
• company-specific: earnings volatility, leverage, customer concentration, governance issues

Technical analysis (high level)

Series 86 expects recognition, not deep charting:

• trend and momentum concepts
• support/resistance as behavioral price zones (high level)
• volume as a confirmation signal (high level)

Large shareholder exposure and activism

• Overhang: concentrated holders can pressure price if selling is likely (high level).
• Activist investors: can create catalysts (strategy changes, capital returns, break-ups).

Catalyst list (what can change the stock price)

Macro catalysts:

• rates and inflation data
• growth/recession signals

Political/regulatory catalysts:

• new regulation, enforcement, policy announcements

Company catalysts:

• earnings surprises, guidance changes
• product launches, pricing actions, margin inflections
• M&A, divestitures, restructurings
• management changes

Series 86 pattern: “best catalyst” is the one that changes either cash flows or the discount rate.

Common traps (fast review)

• Mixing EV and equity valuation (wrong multiple/value pairing).
• Using P/E when earnings are negative or heavily distorted.
• Ignoring normalized earnings in cyclical industries.
• Treating non-GAAP adjustments as automatically “better” without checking recurrence.
• Comparing companies without accounting for major accounting method differences.
• Overweighting “interesting” catalysts that don’t actually change cash flows or risk.

Glossary (expanded, Series 86 scope)

Macro and markets (high level)

• Base effects: comparisons that look “strong/weak” because last period was unusually low/high (high level).
• Business cycle: expansion/peak/contraction/trough pattern that drives cyclicality in earnings and multiples (high level).
• Credit spread: yield difference between corporate debt and a risk-free benchmark; proxy for credit risk appetite (high level).
• Discount rate: required return used to convert future cash flows into present value.
• Duration (concept): sensitivity of value to interest rate changes; “long-duration” equities are more rate-sensitive (high level).
• Equity risk premium (ERP): extra return investors demand for equities over risk-free rates (high level).
• Inflation pass-through: ability to raise prices to offset higher input costs (pricing power, high level).
• Liquidity (market): ease of trading without moving price; can affect multiples and volatility (high level).
• Real vs nominal: “real” strips inflation; “nominal” includes inflation (keep consistent with discount/growth).
• Risk appetite: market willingness to take risk; often visible in credit spreads and equity multiples (high level).
• Yield curve: interest rates across maturities; inversion/steepening can signal cycle/rate expectations (high level).

Financial statements and cash flow

• Accrual: accounting recognition that is not equal to cash timing; explains why earnings and cash can diverge.
• AR / AP / inventory: key working capital accounts; drive cash conversion.
• Capex: capital expenditures; cash reinvestment required to maintain or grow the business.
• Cash conversion cycle (CCC): DSO + DIO − DPO (concept); how quickly operations turn into cash.
• CFO / CFI / CFF: cash from operations / investing / financing; helps explain where cash came from (concept).
• D&A: non-cash expense that allocates past capex; added back in FCFF but signals reinvestment needs (high level).
• EBIT / EBITDA: operating profit before interest; EBITDA is a proxy, not cash flow (high level).
• Fixed vs variable costs: cost structure that drives operating leverage and margin sensitivity (high level).
• Free cash flow (FCF): cash after operating needs and reinvestment; definition must be stated (FCFF vs FCFE).
• Net working capital (NWC): operating current assets minus operating current liabilities (concept).
• Operating leverage: earnings sensitivity to volume because of fixed costs; amplifies upside and downside (high level).

Modeling and forecasting

• Driver-based forecast: model built from volume/price/mix, margin drivers, capex and working capital assumptions.
• Base / bull / bear case: scenario set showing a range of outcomes and key sensitivities (high level).
• Bottom-up vs top-down: forecasting approach from unit drivers vs macro/market share constraints (high level).
• Operating model: the way inputs (price, volume, mix, costs) turn into margin and cash (high level).
• Normalization: adjusting a metric to a mid-cycle or sustainable level (especially for cyclicals).
• One-time item: unusual or non-recurring gain/loss; must be evaluated for true recurrence (exam level).
• Scenario analysis: changing multiple assumptions together to reflect a coherent alternative world (high level).
• Sensitivity analysis: showing how value changes when a key assumption changes (WACC, g, margins, growth).

Valuation and cost of capital

• Beta (β): measure of equity sensitivity to market movements (CAPM input, high level).
• CAPM: r_e = r_f + β × ERP (concept) for cost of equity.
• Cost of debt: required return lenders demand; tied to credit spreads and risk (high level).
• Cost of capital: required return demanded by capital providers; higher risk → higher required return.
• DCF: valuation based on present value of future free cash flows.
• DDM / Gordon growth: dividend-based valuation approach; best for stable dividend payers (high level).
• Enterprise value (EV): value of operations independent of capital structure (concept).
• Equity value: residual value for common shareholders after debt and other claims (concept).
• Exit multiple: terminal value method using a multiple applied to a terminal-year metric (EBITDA, EBIT, sales).
• FCFF (unlevered FCF): cash flow available to all capital providers; discount with WACC.
• FCFE (levered FCF): cash flow available to equity after debt service; discount with cost of equity (high level).
• Multiple: valuation ratio (e.g., P/E, EV/EBITDA); must match numerator/denominator definitions and time period.
• Net debt: debt minus cash; used to bridge EV to equity value (concept).
• Perpetuity growth rate (g): long-run growth assumption used in terminal value; should be conservative (high level).
• ROIC: return on invested capital; key measure of value creation when compared to WACC (high level).
• NOPAT: net operating profit after tax (concept; used in ROIC and FCFF logic).
• Economic profit: value created when ROIC exceeds cost of capital (high level).
• SOTP: sum-of-the-parts valuation across segments with different economics (high level).
• Terminal value (TV): value of cash flows beyond explicit forecast; often a large share of DCF value (high level).
• WACC: blended discount rate for FCFF using market weights of debt and equity (concept).

Accounting, adjustments, and comparability (high level)

• Accounting comparability: making sure peers are compared on consistent accounting bases.
• Adjusted EBITDA: EBITDA after adjustments; evaluate recurrence and legitimacy (high level).
• Capitalization vs expensing: shifting costs into assets can inflate current-period earnings (high level).
• Deferred revenue: cash received before revenue recognition; can be a quality-of-revenue signal (high level).
• Goodwill impairment: accounting write-down; can signal overpayment or deteriorating economics (high level).
• Lease effect: leases can be debt-like obligations; can affect leverage and EBITDA comparability (high level).
• Non-GAAP metric: performance measure not defined by GAAP; requires careful interpretation (high level).
• SBC: stock-based compensation; non-cash today but a real dilution/economic cost (high level).

Catalysts and technicals (high level)

• Catalyst: event that can change fundamentals or the market’s perception of risk/value.
• Guidance: management forward-looking expectations; changes can move price quickly (high level).
• Momentum: tendency for price trends to persist; exam-level recognition only (high level).
• Overhang: large shareholder supply risk that can pressure price (high level).
• Support / resistance: behavioral price zones often referenced in technical analysis (high level).