Series 16 flashcards
Series 16 · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Reasonable basis
- Analysts must have a reasonable basis, supported by diligent investigation, for recommendations and must be able to justify them with documentation.
- Fair and balanced report
- Research must present both positive and negative factors and clearly distinguish facts from opinions and forecasts.
- Principal review requirement
- A qualified supervisory principal must review and approve research reports before distribution to ensure standards and disclosures are met.
- Research record retention
- Supporting records for research reports generally must be retained for three years, with the first two years easily accessible.
- Conflict disclosure ownership
- Reports must disclose if the firm or analyst owns 1% or more of the subject company's equity securities.
- Investment banking compensation disclosure
- If the firm received investment banking compensation from the subject company in the past 12 months, that must be disclosed.
- Promises of favorable research prohibited
- Firms may not promise favorable research ratings or specific price targets to induce investment banking business.
- Current ratio
- Current assets divided by current liabilities; measures a company's short-term liquidity and ability to meet near-term obligations.
- Quick ratio
- Cash plus marketable securities plus receivables divided by current liabilities; excludes inventory from the liquidity measure.
- FIFO rising prices
- FIFO produces higher ending inventory, lower cost of goods sold, and higher net income when prices rise.
- LIFO rising prices
- LIFO produces lower ending inventory, higher cost of goods sold, lower taxable income, and lower net income when prices rise.
- Diluted EPS
- Net income minus preferred dividends divided by weighted average shares plus dilutive potential shares such as options.
- Operating cash flow
- Cash generated from core operations, adjusted for noncash items and changes in working capital accounts.
- DCF terminal value
- Terminal value equals the final year free cash flow times (1 plus g) divided by (WACC minus g).
- WACC formula
- Weighted average cost of capital equals equity weight times cost of equity plus debt weight times after-tax cost of debt.
- CAPM
- Cost of equity equals the risk-free rate plus beta multiplied by the market risk premium.
- Enterprise value
- Enterprise value equals market capitalization plus debt plus preferred stock plus minority interest minus cash and equivalents.
- PEG ratio
- Price-to-earnings ratio divided by expected earnings growth rate; lower values may indicate undervaluation relative to growth.
- Dividend discount model
- The dividend discount model states P0 equals D1 divided by (required return minus growth rate) for constant growth.
- Comparable company analysis
- Values a company using multiples such as P/E or EV/EBITDA of similar publicly traded firms.
- Price target methodology
- A price target must be based on a stated valuation method and time horizon, and updated when assumptions change.
- Rating distribution disclosure
- Firms must disclose the percentage of ratings in each category, such as buy, hold, and sell.
- Discontinuing coverage
- When ending coverage, the analyst should issue a final report or notice disclosing the reason and removing the rating.
- Estimate revisions
- Changes to earnings estimates must be documented with rationale and reviewed by a supervisory principal.
- GAAP versus adjusted estimates
- Earnings estimates should specify whether they are based on GAAP or adjusted non-GAAP measures.
- Analyst independence
- Analysts must issue recommendations reflecting their genuine views, free from pressure by investment banking colleagues.
- Rule 2241
- FINRA rule governing research analysts and reports, including independence, supervision, disclosure requirements, and quiet periods.
- Regulation AC
- Requires analysts to certify that report views are their own and compensation is not tied to specific recommendations.
- IPO quiet period
- Managing underwriters may not publish research for 40 calendar days after an IPO or 10 days after a secondary offering.
- Anti-retaliation provision
- Firms may not retaliate against analysts for unfavorable research or for refusing to change a rating.
- Material nonpublic information
- Analysts may not trade or tip others on material nonpublic information obtained during research activities.
- Recordkeeping Rule 4511
- Requires firms to retain books and records, including research communications, generally for three years.