Series 16 cheat sheet

Research reports must be based on a reasonable basis and be fair and balanced, presenting both supporting and contrary evidence.

Facts, opinions, and forecasts must be clearly distinguished; estimates and projections must be labeled as such.

A qualified supervisory principal must review and approve reports before distribution, including rating changes and price targets.

Supporting records-models, source data, notes, and drafts-must be retained under Rule 4511, generally three years with the first two easily accessible.

Material conflicts must be disclosed: 1% or greater equity ownership, investment banking compensation in the past 12 months, and market-making activity.

Firms may not promise favorable ratings, price targets, or research coverage to obtain investment banking business.

Analysts may not publish research while in possession of material nonpublic information or during applicable quiet periods.

Third-party research must be reviewed for reliability and, if used, its source and any conflicts disclosed.

Current ratio = current assets ÷ current liabilities; quick ratio = (cash + marketable securities + receivables) ÷ current liabilities.

Under FIFO with rising prices, ending inventory is higher, cost of goods sold is lower, and net income is higher than under LIFO.

Under LIFO with rising prices, ending inventory is lower, cost of goods sold is higher, and taxable income is lower than under FIFO.

Diluted EPS = (net income − preferred dividends) ÷ (weighted average shares + dilutive potential shares), applying the treasury stock method to options.

The cash flow statement classifies cash flows as operating (core business), investing (capital expenditures, acquisitions), and financing (debt, equity, dividends).

Capitalizing a cost increases current assets and current net income and shifts the expense to future depreciation or amortization.

Revenue is recognized when a performance obligation is satisfied and control of the good or service transfers to the customer.

Quality-of-earnings red flags include rising accruals, aggressive revenue recognition, and recurring items labeled as nonrecurring.

DCF value = present value of projected free cash flows + present value of terminal value; terminal value = FCF at final year × (1 + g) ÷ (WACC − g).

WACC = (equity ÷ total capital) × cost of equity + (debt ÷ total capital) × cost of debt × (1 − tax rate).

CAPM: cost of equity = risk-free rate + beta × (market return − risk-free rate).

Enterprise value = market capitalization + debt + preferred stock + minority interest − cash and cash equivalents.

P/E = price ÷ earnings per share; PEG = P/E ÷ expected earnings growth rate.

Constant-growth dividend discount model: P0 = D1 ÷ (required return − growth rate).

Comparable company analysis applies peer multiples such as P/E and EV/EBITDA; precedent transactions apply acquisition multiples.

Sensitivity analysis tests how valuation changes with key assumptions such as growth, margins, and discount rate.

Ratings must have clear definitions, such as buy, hold, and sell, and must be applied consistently across coverage.

A price target must be derived from a stated methodology with an explicit time horizon and updated when assumptions change.

Earnings estimates must specify the period covered and whether they are based on GAAP or adjusted non-GAAP measures.

Changes to estimates or ratings require documented rationale and supervisory review before publication.

Firms must disclose the distribution of ratings across categories and any applicable investment banking relationships.

Discontinuing coverage requires a final report or public notice stating the reason and removing the rating.

Analyst compensation may not be tied to specific investment banking transactions or to favorable ratings.

Recommendations must reflect the analyst's genuine view and be free from pressure by investment banking personnel.

FINRA Rule 2241 governs research analysts and research reports, covering independence, supervision, disclosure, and quiet periods.

Regulation AC requires analyst certification that report views are personal and that compensation is not tied to specific recommendations.

Managing underwriters may not publish research for 40 calendar days after an IPO or 10 days after a secondary offering.

Firms may not retaliate against analysts for unfavorable research or for refusing to change a rating.

Analysts may not trade on or tip others about material nonpublic information obtained through research activities.

Required disclosures include 1% or greater ownership, market-making activity, and investment banking compensation received in the past 12 months.

Rule 4511 requires retention of books and records, including research communications, generally for three years.

Research communications must be fair and balanced and may not guarantee specific outcomes or returns.