Series 86 — Research Analyst Qualification Examination (Part I) Exam Blueprint

How to Use This Exam Blueprint

Use this checklist as a practical readiness map for the FINRA Series 86 — Research Analyst Qualification Examination (Part I). The goal is not just to recognize formulas or terms, but to apply research-analysis judgment under exam conditions.

For each area, ask:

• Can I explain the concept without notes?
• Can I apply it to a company, industry, or security scenario?
• Can I calculate the result and interpret what it means?
• Can I identify which data matters and which data is noise?
• Can I choose the most appropriate valuation or analytical approach?

Because exact topic weights are not provided here, treat the sections below as readiness areas, not as a prediction of exam weighting.

Series 86 Readiness Areas at a Glance

Financial Statement Analysis Checklist

Core Statements

Can You Do This?

• Reconcile why net income and operating cash flow differ.
• Identify whether growth is driven by volume, price, acquisitions, accounting changes, or currency.
• Explain how rising receivables relative to sales may affect earnings quality.
• Distinguish recurring operating income from one-time gains or charges.
• Interpret gross margin, operating margin, EBITDA margin, and net margin trends.
• Identify whether margin improvement is sustainable or temporary.
• Explain how capitalizing versus expensing affects earnings, assets, and cash flow presentation.
• Compare two companies with different depreciation methods or capital intensity.
• Detect when EPS growth is driven mainly by share repurchases rather than operating growth.
• Explain how leverage magnifies both returns and downside risk.

Key Ratio Readiness

Accounting Quality and Adjustment Checks

Common Accounting Areas

Earnings Quality Prompts

• Are earnings supported by operating cash flow?
• Are margins improving because of mix, pricing, cost control, accounting estimates, or temporary factors?
• Are “adjusted” earnings excluding recurring costs?
• Is working capital a source or use of cash?
• Are acquisitions masking weak organic growth?
• Are management estimates changing in a way that boosts reported income?
• Are reserves being released?
• Is depreciation expense understated relative to maintenance capital needs?

Valuation Methods Checklist

Relative Valuation

Intrinsic Valuation

Core Valuation Formulas to Know

Enterprise value:

\[ EV = \text{Market Value of Equity} + \text{Debt} + \text{Preferred Stock} + \text{Minority Interest} - \text{Cash and Equivalents} \]

Equity value from enterprise value:

\[ \text{Equity Value} = EV - \text{Debt} - \text{Preferred Stock} - \text{Minority Interest} + \text{Cash and Equivalents} \]

Price/earnings:

\[ P/E = \frac{\text{Price per Share}}{\text{Earnings per Share}} \]

EV/EBITDA:

\[ EV/EBITDA = \frac{\text{Enterprise Value}}{\text{EBITDA}} \]

Dividend discount model, constant growth:

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

Free cash flow to firm:

\[ FCFF = EBIT(1 - T) + \text{Depreciation and Amortization} - \text{Capex} - \Delta \text{Working Capital} \]

Free cash flow to equity:

\[ FCFE = \text{Net Income} + \text{Depreciation and Amortization} - \text{Capex} - \Delta \text{Working Capital} + \text{Net Borrowing} \]

Terminal value using perpetual growth:

\[ TV = \frac{FCF_{n+1}}{WACC - g} \]

Valuation Readiness Tasks

• Convert between enterprise value and equity value.
• Explain why EV multiples are capital-structure neutral.
• Identify when P/E is misleading.
• Choose peer companies based on business model, growth, margins, geography, and risk.
• Normalize earnings for cyclical, unusual, or nonrecurring effects.
• Explain why a company with a higher multiple may still be cheaper if growth, margins, or returns are superior.
• Identify whether the target price is driven mainly by multiple expansion, earnings growth, or balance-sheet change.
• Sensitize a DCF to discount rate, terminal growth, margin, and capex assumptions.
• Explain why small changes in terminal assumptions can materially change valuation.
• Distinguish value creation from accounting growth.

Forecasting and Financial Modeling Checklist

Forecast Drivers

Modeling Checks

• Forecast revenue from drivers, not just a flat growth percentage, when the scenario provides driver data.
• Connect balance-sheet accounts to operating assumptions.
• Avoid assuming margin improvement without a business reason.
• Separate reported results from adjusted or normalized results.
• Use diluted shares when equity claims may increase.
• Reflect interest rate changes when debt is floating-rate or refinancing is likely.
• Check whether capex is sufficient to support growth.
• Test whether cash flow supports dividends, buybacks, or debt repayment.
• Identify circularity risk when interest expense depends on debt that depends on cash flow.
• Interpret model output rather than treating it as automatically correct.

Corporate Finance and Cost of Capital

Key Concepts

Cost of Capital Formulas

Capital Asset Pricing Model:

\[ r_e = r_f + \beta(r_m - r_f) \]

Weighted average cost of capital:

\[ WACC = \left(\frac{E}{D+E}\right)r_e + \left(\frac{D}{D+E}\right)r_d(1-T) \]

Can You Do This?

• Explain why a higher beta generally increases the cost of equity.
• Identify why rising interest rates can lower equity valuation multiples.
• Distinguish business risk from financial risk.
• Determine whether debt-funded buybacks improve EPS but increase risk.
• Explain why lower WACC does not automatically justify unlimited leverage.
• Assess whether an acquisition is accretive, dilutive, or strategically questionable.
• Connect capital allocation choices to shareholder value.

Economics, Markets, and Sector Sensitivity

Macro Exam Blueprint

Scenario Cues

Industry and Competitive Analysis

Industry Structure Checks

• Identify whether the industry is cyclical, defensive, secular-growth, commodity-like, or regulated.
• Evaluate barriers to entry, switching costs, brand strength, patents, network effects, and scale.
• Assess bargaining power of suppliers and customers.
• Determine whether pricing power exists.
• Separate volume growth from price growth.
• Consider substitution risk and technological disruption.
• Understand capacity additions, utilization, and inventory cycles.
• Identify whether margins are mean-reverting.
• Compare company performance to industry benchmarks.
• Identify catalysts that could change investor expectations.

Competitive Position Table

Fixed Income, Preferreds, and Convertibles Awareness

Series 86 candidates should be comfortable with debt and hybrid securities when they affect company valuation, capital structure, dilution, or risk.

Capital Structure Priority Prompt

When a company is stressed, ask:

1. Who has the senior claim?
2. Is there enough enterprise value to cover debt?
3. What remains for preferred or common equity?
4. Are convertibles likely to convert or remain debt-like?
5. Does the market price imply recovery risk, dilution, or solvency concern?

Quantitative Methods and Statistics

Time Value of Money

Net present value:

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

Compound annual growth rate:

\[ CAGR = \left(\frac{Ending\ Value}{Beginning\ Value}\right)^{1/n} - 1 \]

Statistics and Research Tools

Quantitative Traps

• Confusing correlation with causation.
• Treating historical beta as permanently stable.
• Ignoring outliers or one-time events in historical data.
• Annualizing a short-term trend without considering seasonality.
• Comparing companies using inconsistent accounting definitions.
• Using nominal growth when real growth is required, or vice versa.
• Treating a precise model output as more reliable than its assumptions.

Research Thesis, Catalysts, and Risk Assessment

Investment Thesis Checklist

A defensible research view should connect:

Catalyst Examples

• Earnings revisions
• Margin inflection
• Product launch
• Regulatory change
• Capital return announcement
• Debt refinancing
• Restructuring
• Asset sale
• Industry consolidation
• Commodity or currency move
• Management change
• Guidance change

Risk Categories

Scenario and Decision-Point Checks

Choosing the Right Valuation Method

Interpreting a Margin Change

    flowchart TD
	    A[Margin changed] --> B{Revenue changed too?}
	    B -->|Yes| C[Check volume, price, mix, operating leverage]
	    B -->|No| D[Check costs, accounting estimates, one-time items]
	    C --> E{Cash flow confirms?}
	    D --> E
	    E -->|Yes| F[More likely operating improvement]
	    E -->|No| G[Investigate earnings quality]

Exam-Style Decision Prompts

• If sales rise but operating cash flow falls, what accounts explain the difference?
• If a company trades at a discount to peers, is it undervalued or lower quality?
• If EPS rises after a debt-funded repurchase, did shareholder value improve or did risk increase?
• If EBITDA improves but free cash flow declines, what happened to capex or working capital?
• If a company has high ROE, is it due to high margins, asset turnover, or leverage?
• If a DCF target price is far above market price, which assumption deserves the most scrutiny?
• If a peer multiple is used, are the peers truly comparable?
• If management excludes restructuring costs every year, should those costs be considered recurring?
• If interest rates rise, which valuation inputs are directly affected?
• If a company misses revenue but beats EPS, what cost or quality issues should be reviewed?

Important Formula and Interpretation Checklist

DuPont Analysis

\[ ROE = \text{Net Profit Margin} \times \text{Asset Turnover} \times \text{Equity Multiplier} \]

Use DuPont analysis to determine whether ROE is driven by profitability, efficiency, or leverage.

Common Weak Areas and Traps

Final-Week Review Checklist

Content Review

• Rework core ratio calculations until they are automatic.
• Review valuation methods and when each is appropriate.
• Practice converting enterprise value to equity value and per-share value.
• Review financial statement relationships, especially net income versus cash flow.
• Drill working-capital interpretation.
• Review accounting adjustments that affect sustainable earnings.
• Practice DCF sensitivity and terminal value interpretation.
• Review WACC, CAPM, beta, and leverage effects.
• Review macro-to-sector linkages.
• Review industry analysis and competitive positioning.
• Review quantitative concepts: correlation, regression, standard deviation, CAGR, NPV, IRR.
• Review common traps involving EBITDA, adjusted EPS, dilution, and cyclicality.

Scenario Practice

• For each practice question, identify the business issue before calculating.
• Write down what the question is really asking: valuation, accounting quality, risk, macro impact, or forecast logic.
• Check whether the answer should be based on equity value, enterprise value, earnings, cash flow, or book value.
• Eliminate choices that are directionally wrong before doing detailed math.
• After each missed question, record the missed concept, not just the correct answer.

Exam-Day Readiness

Practical Next Step

Use this checklist to sort your remaining study time into three groups: must relearn, needs practice, and ready. Then work targeted Series 86 practice questions by topic, especially financial statement interpretation, valuation selection, modeling assumptions, and scenario-based research judgment.