Find my exam

Series 86/87 Practice Questions (2026) — Free Sample Questions with Answers

15 free Series 86/87 questions from our 150-question bank, grouped by content domain. Each answer explains why the right option is right — and why every wrong option is wrong.

Information and Data Collection (2)Data Verification and Analysis (4)Valuation and Forecasting (4)Preparation of Research Reports (3)Dissemination and Marketing of Information (2)
0 of 15 answered — answer a question to check it Take a full Series 86/87 practice test

Information and Data Collection

Question 1

A commodity chemical industry is running at 96% of capacity. Demand is forecast to grow 4% a year, and a new world-scale plant takes about three years to build. Industry capacity, ranked by cash cost, ends with a group of old, inefficient high-cost plants. Which pricing outcome is MOST likely over the next two years?

Show answer & explanation

Answer: D

Prices fall, because low-cost producers will add capacity quickly to capture the extra demand: New capacity takes about three years, so supply cannot respond within the two-year window.

Prices settle near the industry's average cash cost, because commodity prices reflect average cost: In a commodity market the price is set by the marginal (highest-cost) producer needed to meet demand, not by average cost.

Prices are set by the lowest-cost producer, so margins narrow for every producer in the industry: The lowest-cost producer does not set price when demand requires output from high-cost plants.

Prices rise toward or above the high-cost plants' cash cost, widening the low-cost producers' margins: Correct. Near full utilization, demand sits on the steep end of the industry supply (cost) curve, where the high-cost plants are the marginal suppliers. Price must at least cover their cash cost and can exceed it when capacity is short, so low-cost producers earn wide margins until new plants arrive.

Commodity prices are set by the marginal producer on the industry cost curve; high utilization plus long lead times for new capacity mean rising prices and margins.

Question 2

A research analyst covering industrial distributors is updating the macroeconomic section of an industry report using the data in Exhibit 1. Which conclusion is BEST supported by the trends from Q1 to Q4?

Exhibit 1: Quarterly economic data for a hypothetical economy (percent unless noted)
IndicatorQ1Q2Q3Q4
Building permits, private housing (thousands, annual rate)1,5201,4601,3901,310
Average weekly initial jobless claims (thousands)212224241263
Manufacturers' new orders, consumer goods (% change q/q)+1.4+0.6−0.3−0.9
Industrial production (% change q/q, annualized)2.82.52.11.9
Nonfarm payrolls (average monthly change, thousands)245230205180
Unemployment rate3.83.83.94.0
Average duration of unemployment (weeks)19.219.620.321.1
CPI, year over year3.13.43.63.7
3-month Treasury bill yield4.604.905.155.25
10-year Treasury note yield4.704.754.654.45
Policy rate target, upper bound4.755.005.255.50
All data are invented for illustration.
Show answer & explanation

Answer: B

The economy has already entered a recession, as the Q4 coincident indicators show: The coincident indicators are still positive in Q4 (industrial production +1.9%, payrolls +180,000 a month); they show slowing, not contraction.

Leading indicators signal a slowdown ahead, but coincident indicators show continued expansion: Correct. The leading series have all turned down: permits fell from 1,520 to 1,310, claims rose from 212 to 263 and consumer-goods orders went from +1.4% to −0.9%. The coincident series are slowing but still positive: industrial production +1.9% annualized and payrolls +180,000 a month in Q4. The pattern is a late-cycle slowdown, not yet a contraction.

Rising unemployment duration and CPI inflation show that the expansion is accelerating into Q4: Unemployment duration and CPI are lagging indicators; their rise confirms a mature expansion and says nothing about acceleration.

Rising unemployment duration, a lagging series, confirms the cycle already peaked by Q2: Average duration of unemployment is a lagging indicator that confirms turns after the fact; the coincident series (industrial production, payrolls) are still growing in Q4, so no peak has been confirmed.

Leading indicators (permits, jobless claims, new orders, the yield curve) turn before the economy; coincident indicators (industrial production, payrolls) show where it is now; lagging indicators (unemployment duration, CPI, the prime rate) confirm turns afterward.

Data Verification and Analysis

Question 3

A retailer reports total debt of $400 million and EBITDA of $200 million. Its ASC 842 footnote shows operating lease liabilities of $300 million and annual operating lease cost (rent, recorded in operating expenses) of $60 million. To compare it with peers that own their stores, the analyst computes lease-adjusted debt to EBITDAR, using the reported lease liability as lease debt. What is the ratio?

Show answer & explanation

Answer: B

  1. Lease-adjusted debt = total debt + operating lease liabilities = 400 + 300 = 700.
  2. EBITDAR = EBITDA + operating lease cost = 200 + 60 = 260.
  3. Ratio = 700 ÷ 260 = 2.69 → 2.7×.
  4. Meaning: once leases are treated as debt, the retailer is more levered than its 2.0× reported debt/EBITDA suggests.

2.0×: Unadjusted debt ÷ EBITDA (400 ÷ 200); it ignores the leases that make the retailer comparable with store-owning peers.

2.7×: Correct. Lease-adjusted debt = 400 + 300 = 700; EBITDAR = 200 + 60 = 260; 700 ÷ 260 = 2.7×.

3.4×: Capitalizes rent at 8× (60 × 8 = 480) instead of using the reported ASC 842 lease liability: (400 + 480) ÷ 260 = 3.4×.

3.5×: Adds the lease liability to debt but leaves rent in the denominator (700 ÷ 200); numerator and denominator must both be lease-adjusted.

Under ASC 842 operating leases put a lease liability on the balance sheet while rent stays in operating expense; for like-for-like leverage, add the liability to debt and the rent back to EBITDA (debt ÷ EBITDAR).

Question 4

To compare balance sheets with FIFO peers, the analyst restates Kenwood's FY2 balance sheet as if the company had always used FIFO. Using Exhibit 2, by how much would Kenwood's FY2 year-end shareholders' equity be higher ($ millions)?

Show answer & explanation

Answer: D

  1. Data: FY2 year-end LIFO reserve 110; tax rate 25%.
  2. Formula: increase in equity = LIFO reserve × (1 − tax rate).
  3. Arithmetic: 110 × 0.75 = 82.5; tax effect 110 × 0.25 = 27.5 added to liabilities.
  4. Answer: equity rises $82.5 million; inventory rises $110 million.

$22.5: Uses only the FY2 change in the reserve after tax (30 × 0.75); equity reflects the cumulative reserve.

$27.5: This is the deferred tax on the reserve (110 × 0.25), which goes to liabilities, not equity.

$30.0: Uses the pre-tax FY2 change in the reserve instead of the cumulative after-tax amount.

$82.5: Correct. Under FIFO, inventory would be higher by the full year-end reserve of 110. Taxes of 110 × 25% = 27.5 go to (deferred) tax liabilities, so equity rises by 110 × (1 − 0.25) = $82.5 million.

Balance-sheet restatement LIFO→FIFO: inventory + reserve; liabilities (taxes) + reserve × t; equity + reserve × (1 − t).

Question 5

Using Exhibit 1 and average FY1–FY2 balances, an analyst computes Juniper Ridge's FY2 cash conversion cycle. She uses revenue for receivable days and cost of goods sold for inventory and payable days, with a 365-day year. What is the FY2 cash conversion cycle?

Exhibit 1A: Juniper Ridge Outfitters — income statement ($ millions)
Line itemFY1FY2
Revenue1,8002,000
Cost of goods sold1,0801,160
Gross profit720840
Selling, general and administrative expense450500
Operating income270340
Interest expense3040
Pre-tax income240300
Income tax expense6075
Net income180225
Exhibit 1B: Juniper Ridge Outfitters — selected balance sheet data at fiscal year-end ($ millions)
Line itemFY1FY2
Accounts receivable200240
Inventory270310
Accounts payable150170
Total assets1,5001,700
Total debt500600
Shareholders' equity750830
FY2 dividends paid: $145 million. No shares were issued or repurchased; 100 million diluted shares in both years. All data are invented.
Show answer & explanation

Answer: C

  1. Data: average AR (200 + 240) ÷ 2 = 220; average inventory (270 + 310) ÷ 2 = 290; average AP (150 + 170) ÷ 2 = 160; FY2 revenue 2,000; FY2 COGS 1,160.
  2. Formula: CCC = DSO + DIO − DPO.
  3. DSO = 220 ÷ 2,000 × 365 = 40.2; DIO = 290 ÷ 1,160 × 365 = 91.3; DPO = 160 ÷ 1,160 × 365 = 50.3.
  4. Answer: 40.2 + 91.3 − 50.3 = 81 days.
  5. Meaning: cash is tied up about 81 days between paying suppliers and collecting from customers; inventory is the main driver.

43 days: Computes inventory days on revenue (290 ÷ 2,000 × 365 = 52.9) instead of COGS.

64 days: Computes both inventory and payable days on revenue rather than COGS (40.2 + 52.9 − 29.2).

81 days: Correct. DSO = 220 ÷ 2,000 × 365 = 40.2; DIO = 290 ÷ 1,160 × 365 = 91.3; DPO = 160 ÷ 1,160 × 365 = 50.3. CCC = 40.2 + 91.3 − 50.3 = 81 days.

88 days: Uses year-end FY2 balances (240, 310, 170) instead of averages: 43.8 + 97.5 − 53.5.

CCC = DSO (AR ÷ revenue × 365) + DIO (inventory ÷ COGS × 365) − DPO (AP ÷ COGS × 365), using average balances.

Question 6

Brightwater Industries (net income $400 million; 200 million diluted shares; share price $30) agrees to buy Calloway Systems (net income $60 million). It will pay $1.2 billion in cash, borrowed at a 5% interest rate, plus 20 million new Brightwater shares. The tax rate is 25%. Ignoring synergies and deal amortization, what is Brightwater's pro forma first-year EPS?

Show answer & explanation

Answer: D

  1. Data: acquirer NI 400, 200 million shares; target NI 60; cash 1,200 at 5%; 20 million new shares; tax 25%.
  2. Formula: pro forma EPS = (NI acquirer + NI target − after-tax financing cost) ÷ (old shares + new shares).
  3. After-tax interest: 1,200 × 0.05 × 0.75 = 45.
  4. Pro forma NI: 400 + 60 − 45 = 415; shares 220; EPS = 415 ÷ 220 = $1.89.
  5. Meaning: versus stand-alone EPS of 400 ÷ 200 = $2.00, the deal is about 5.7% dilutive before synergies.

$1.61: Leaves out Calloway's $60 million of net income: (400 − 45) ÷ 220.

$1.78: Charges interest on the full $1.8 billion price, including the stock portion: 460 − 67.5 = 392.5 ÷ 220.

$1.82: Deducts pre-tax interest of $60 million instead of after-tax interest of $45 million: 400 ÷ 220.

$1.89: Correct. After-tax interest = 1,200 × 5% × (1 − 0.25) = $45 million. Pro forma net income = 400 + 60 − 45 = $415 million; shares = 200 + 20 = 220 million; EPS = 415 ÷ 220 = $1.89, about 5.7% dilutive to the stand-alone $2.00.

Pro forma EPS = (combined NI − after-tax interest on new debt − forgone interest on cash) ÷ (acquirer shares + shares issued); compare with stand-alone EPS to judge accretion or dilution.

Valuation and Forecasting

Question 7

Marlow Utilities has just paid an annual dividend of $2.00 per share. An analyst expects the dividend to grow 10% a year for the next two years and 4% a year thereafter. The required return on equity is 9%. Using a two-stage dividend discount model, what is the intrinsic value per share today?

Show answer & explanation

Answer: C

  1. Dividends: D1 = 2.00 × 1.10 = 2.20; D2 = 2.20 × 1.10 = 2.42; D3 = 2.42 × 1.04 = 2.5168.
  2. Terminal value at end of year 2: P2 = D3 ÷ (r − g) = 2.5168 ÷ (0.09 − 0.04) = 50.336.
  3. PV of D1 = 2.20 ÷ 1.09 = 2.018.
  4. PV of (D2 + P2) = (2.42 + 50.336) ÷ 1.1881 = 52.756 ÷ 1.1881 = 44.404.
  5. Value = 2.018 + 44.404 = $46.42 per share.

$41.60: Applies a single-stage Gordon model at 4% growth from today (2.08 ÷ 0.05), ignoring the two years of 10% growth.

$44.79: Computes the year-2 terminal value from D2 instead of D3 (2.42 ÷ 0.05 = 48.40), one year of growth short.

$46.42: Correct. D1 = 2.20, D2 = 2.42, D3 = 2.517; P2 = 2.517 ÷ 0.05 = 50.34; value = 2.20 ÷ 1.09 + (2.42 + 50.34) ÷ 1.09² = 2.02 + 44.40 = $46.42.

$54.39: Adds the year-2 terminal value of 50.34 without discounting it back to today.

Two-stage DDM: discount each high-growth dividend, then add a Gordon terminal value built on the first stable-growth dividend (D(n+1)) and discounted n periods.

Question 8

An analyst initiating coverage of Norwell Packaging values the company by applying the peer median FY2E EV/EBITDA multiple in the exhibit to Norwell's FY2E EBITDA. What implied equity value per diluted share does this produce?

Packaging peer comparables (FY2 estimates; multiples at current share prices)
CompanyEV/EBITDA (x)P/E (x)EPS growth FY2–FY4 (% a year)Net debt/EBITDA (x)
Quarry Containers6.012.061.7
Ridgeline Pack9.015.0153.0
Sutton Box10.016.082.0
Tamarack Films9.020.0161.0
Norwell Packaging (subject)——12Net cash
Norwell: share price $36.00; FY2E EBITDA $900 million; FY2E diluted EPS $2.40; cash $500 million and debt $200 million (net cash $300 million); 150 million diluted shares.
Show answer & explanation

Answer: D

  1. Peer EV/EBITDA multiples: 6.0, 9.0, 9.0, 10.0 → median 9.0x.
  2. Implied EV = 9.0 × $900 million FY2E EBITDA = $8,100 million.
  3. EV → equity: equity = EV − net debt = 8,100 − (−300) = $8,400 million (net cash is added).
  4. Per share: 8,400 ÷ 150 million diluted shares = $56.00.
  5. Meaning: about 56% above the $36.00 share price, so on peer EV/EBITDA the stock screens undervalued.

$52.00: Subtracts Norwell's $300 million of net cash as if it were net debt (8,100 − 300 = 7,800; ÷ 150 = 52.00).

$53.00: Uses the peer mean of 8.5x (34.0 ÷ 4) instead of the median of 9.0x: 7,650 + 300 = 7,950; ÷ 150 = 53.00.

$54.00: Treats enterprise value as equity value and ignores the net cash (8,100 ÷ 150 = 54.00).

$56.00: Correct. The peer median EV/EBITDA is 9.0x; 9.0 × 900 = 8,100 of EV; adding 300 of net cash gives 8,400 of equity; ÷ 150 diluted shares = $56.00.

Implied price from an EV multiple = (multiple × metric − net debt) ÷ diluted shares; net cash is added back, and the median is preferred because it resists outliers such as a 6.0x peer.

Question 9

Galeway Robotics holds a 35% share of a market that is forecast to grow 4% a year. An analyst's model assumes Galeway's revenue grows 12% a year for the next five years. Which check of this assumption is MOST important?

Show answer & explanation

Answer: C

  1. Data: share 35%; market growth 4%; company growth 12%; 5 years.
  2. Relative growth per year: 1.12 ÷ 1.04 = 1.0769.
  3. Five years: 1.0769^5 ≈ 1.45.
  4. Implied share: 35% × 1.45 ≈ 51%.

Whether 12% growth is above the expected growth of nominal GDP: Comparing with GDP is a weaker test; the binding constraint is the company's own market, which grows only 4%.

Whether Galeway's revenue grew about 12% a year over the past five years: Past growth does not show that a much larger share of the market can be won from here.

Whether rising to about a 50% market share in five years is plausible: Correct. Growing 12% in a 4% market raises share to about 35% × (1.12 ÷ 1.04)^5 ≈ 35% × 1.45 ≈ 51%. The model implicitly assumes Galeway takes a large amount of share from competitors, which must be justified.

Whether Galeway's operating margin can hold at its current level: Margins matter, but this question is about the revenue assumption, whose key implication is market share.

Test revenue assumptions against the market: company growth above market growth implies share gains that must be plausible.

Question 10

Using all of the FY2E assumptions in Exhibit 1, by approximately what percentage does Ashgrove's operating income grow from FY1 to FY2E?

Show answer & explanation

Answer: C

  1. Data: FY2E revenue 1,081.5; gross margin 45%; fixed opex 200; variable opex 10% of revenue; FY1 EBIT 140.
  2. Gross profit: 1,081.5 × 0.45 = 486.7.
  3. Operating expenses: 200 + 108.2 = 308.2; EBIT = 486.7 − 308.2 = 178.5.
  4. Growth: 178.5 ÷ 140 = 1.275, so +27.5%.
  5. Meaning: degree of operating leverage ≈ 27.5% ÷ 8.15% ≈ 3.4.

8.2%: Assumes operating income grows in line with revenue (8.15%), ignoring fixed costs and the margin change.

19.8%: Keeps the gross margin at the FY1 level of 44%: (475.9 − 308.2) ÷ 140 − 1.

27.5%: Correct. Gross profit = 1,081.5 × 45% = 486.7; operating expenses = 200 + 10% × 1,081.5 = 308.2; EBIT = 178.5. Growth = 178.5 ÷ 140 − 1 = 27.5%.

33.3%: Holds total operating expenses at the FY1 level of 300, ignoring the variable 10% of revenue: 186.7 ÷ 140 − 1.

Forecast EBIT line by line: revenue × gross margin − (fixed + variable operating costs).

Preparation of Research Reports

Question 11

Research analyst Odette Marsh made several television appearances recommending stocks during the quarter ended September 30. By November 5, her firm still has not obtained her quarterly Regulation AC certification covering those appearances. What must the firm do?

Show answer & explanation

Answer: A

Promptly notify its examining authority and disclose the missing certification in her reports for 120 days: Correct. Under Reg AC Rule 502, a firm that does not obtain the quarterly statement within 30 days of quarter end must promptly notify its examining authority and, for 120 days, disclose the non-certification in her reports.

Disclose the missing certification in her research reports for 30 days and keep a record of it for 3 years: Thirty days is the deadline for recording the certification; the disclosure period is 120 days, and notice is required.

Bar her from public appearances for 120 days, with no notice needed if she then provides the certification: Reg AC requires notice and report disclosure, not an appearance ban, and a late statement does not cancel them.

Obtain the certification by the end of the following quarter and note the delay in the firm’s annual review: There is no grace quarter; the 30-day deadline has already passed.

Reg AC public appearances: quarterly certification within 30 days after quarter end; if missing, notify the examining authority and disclose the non-certification for 120 days.

Question 12

Martina Oyelaran wants the investor relations officer of Zeller Industries to check the facts in the business-description section of her draft initiation report. The draft also contains a research summary, a Buy rating and a price target. Which sequence complies with FINRA Rule 2241?

Show answer & explanation

Answer: D

Send the full draft to the IR officer, then give a complete copy to legal or compliance before publication: The subject company may never see the summary, rating or target, and compliance must receive the complete draft first.

Send the IR officer the draft with only the price target removed, then submit the final to compliance: The summary and rating must also be withheld, and the order is wrong.

Send the IR officer the business-description section first, then give compliance the complete draft: Right sections, wrong order: legal or compliance must receive the complete draft before any section goes to the company.

Give legal or compliance the complete draft first, then send the IR officer only the factual sections: Correct. Sections may go to the subject company for fact-checking only after a complete draft is provided to legal/compliance, and never the summary, rating or price target.

Fact review: complete draft to legal/compliance first; then only factual sections to the subject company, never the summary, rating or price target.

Question 13

Sable Point Securities is a co-manager of a follow-on offering by Nordvik Energy, a large issuer whose shares are "actively-traded securities" under Regulation M. The offering prices on Monday. On Tuesday, Sable Point’s analyst wants to publish her regular quarterly earnings review of Nordvik, of the kind the firm has issued for years in compliance with Securities Act Rule 139. Which statement is correct?

Show answer & explanation

Answer: C

She must wait until at least the third day after the offering, because the firm is a co-manager: The 3-day secondary period is the general rule, but it does not prevent Rule 139 reports on actively-traded securities.

She must wait until at least the tenth day after the offering, the period for any firm-underwritten deal: Ten days applies to IPOs, not to secondary offerings.

She may publish now, because Rule 139 reports on actively-traded securities are excepted from the secondary quiet period: Correct. Rule 2241(b)(2)(I) does not bar a Rule 139 research report on a subject company with actively-traded securities (Reg M 101(c)(1)) after a secondary.

She may publish now only if legal or compliance first approves the report under the significant-news exception: A routine earnings review is not significant news; it is the Rule 139 actively-traded exception that permits it.

The 3-day secondary quiet period has two carve-outs: significant news (with legal/compliance approval) and Rule 139 reports on Reg M actively-traded securities.

Dissemination and Marketing of Information

Question 14

Before Trevane Labs files a registration statement for its IPO, Zoller Securities, which expects to be lead underwriter, publishes a glowing report on Trevane’s market and prospects. Trevane is not an emerging growth company. Which statement BEST describes the report?

Show answer & explanation

Answer: D

It is permitted, because Section 5 limits on offers apply only after the registration statement is filed: Section 5 also prohibits offers before filing; publicity that conditions the market can be an offer.

It is permitted under Rule 139, because it is the firm’s first report on the company: Rule 139 does not cover initiations, and an IPO issuer is not S-3 eligible or reporting.

It is permitted under Rule 135, which allows announcements of a proposed registered offering: Rule 135 covers limited issuer notices, not analytical research by an underwriter.

It is likely an illegal pre-filing offer (gun-jumping) under Section 5, with no safe harbor: Correct. A prospective underwriter’s research on a non-EGC IPO issuer before filing can condition the market and be treated as an illegal offer under Section 5.

Before filing, underwriter publicity about a non-EGC IPO issuer can be an illegal offer under Section 5; Rules 137–139 do not cover it.

Question 15

Quorum Securities will publish a downgrade of Sylvan Chemicals at 7:00 a.m. tomorrow. A trader on Quorum’s proprietary desk has learned of the coming downgrade and wants to sell the firm’s inventory of Sylvan shares this afternoon. Under FINRA Rule 5280, which statement is correct?

Show answer & explanation

Answer: C

The sale is permitted, because Rule 5280 restricts only trading in research analysts’ own accounts: Analyst-account restrictions are in Rule 2241; Rule 5280 restricts the member’s own trading.

The sale is permitted if the trader reports it to compliance before the downgrade is released: Reporting the trade does not make trading on advance knowledge of the report permissible.

The sale is prohibited, because the firm may not adjust inventory on advance knowledge of the report: Correct. Rule 5280 bars a member from establishing, increasing, decreasing or liquidating a position based on non-public advance knowledge of a research report’s content or timing.

The sale is permitted if the downgrade report discloses the firm’s sale and its timing: Disclosure afterward does not cure trading ahead of the report.

Rule 5280: a member may not trade for its own account based on non-public advance knowledge of the content or timing of a research report.

Test yourself under exam conditions

Take the free Series 86/87 test and get a score report by domain.

Start free Series 86/87 test
The full Series 86/87 question bank is coming. Get an email when it launches.