Function guide
Series 79 Function 1: collection, analysis and evaluation of data — what is tested and where people slip
Function 1 of the Series 79 (Investment Banking Representative Qualification Exam), Collection, Analysis and Evaluation of Data, carries 37 of the 75 scored items — 49% of the outline — and tests where a banker’s numbers come from, what you do with them, and how you check that they hold up. Most of its items make you compute something before they let you choose.
Series 79 outline
Function 1
Collection, Analysis and Evaluation of Data
37
of 75 scored items
49%
of the outline
12
practice items here
Scope
What Function 1 covers (37 items, 49%)
37
scored items
of 75 on the exam
49%
of the outline
the largest of three functions
1.1–1.3
sub-sections
Function 1 is the biggest of the three functions on the FINRA content outline (© 2025): 37 items, against 20 for underwriting and offerings and 18 for M&A, tender offers and restructuring. Close to every second scored item comes from here, so it is the function to fix first when a practice ledger looks lopsided.
- 1.1 Collection of data — market, industry and company data; comparable companies and precedent deals; Exchange Act filings; and who you may talk to about all of it (clients, research, the syndicate desk, compliance).
- 1.2 Analysis and evaluation — financial statements; liquidity, profitability and leverage ratios; valuation (DCF, comparables, precedents, accretion/dilution, WACC, IRR, NPV, sum of the parts); LIFO and FIFO; investor, entity and financing types.
- 1.3 Due diligence — the disclosure standard, sell-side and buy-side diligence, bring-down diligence and the Sarbanes-Oxley points.
Section 1.2 is where the arithmetic lives, and it is the longest list on the outline. The exam rarely asks you to define EBITDA; it hands you a company with a one-off gain buried in its results and asks what the business is worth without it. The format — 80 items, 150 minutes, a passing score of 73 on a scaled basis — is on the Series 79 exam page; how Function 1 sits beside the other two is in the study guide.
1.1 · collection of data
Collecting the data: filings and sources
Section 1.1 asks which document answers which question, and how fresh it is. Audited history comes from the 10-K, quarterly updates from the 10-Q, and anything material in between — a divestiture, a new credit facility, a change at the top — from the 8-K. When a two-month-old 10-K and last week’s 8-K disagree about what the company owns, the 8-K wins. The exam is fond of a model lovingly built around a division that was sold on Tuesday.
Ownership filings feed the comparables as much as the governance work. A Schedule 13D signals that a holder may push for influence or control; a 13G says the stake is passive. A peer whose price is lifted by an activist’s takeover talk carries a control premium you do not want inside a trading multiple. Related-party deals distort peers the same way: a target buying inputs from its controlling shareholder at a discount, or a founder-CEO on no salary, reports margins a new owner will not inherit. Normalise them to market terms first.
Who you may talk to
The outline puts communication inside 1.1 as well. Under FINRA Rule 2241, investment banking may not review or steer research; material non-public information crosses the wall only through compliance, which tracks sensitive names on watch and restricted lists. Items here usually offer one option where a banker simply phones the analyst. That option is wrong.
- 10-K
- Annual report with audited statements; due 60, 75 or 90 days after year-end, depending on filer size.
- 10-Q
- Quarterly report, unaudited; due in 40 or 45 days.
- 8-K
- Current report on a material event; due within four business days.
- Schedule 14A
- The proxy statement: votes, executive pay, related-party transactions.
- Schedule 13D / 13G
- Ownership above 5%: 13D for holders who may seek control (five business days), 13G for passive holders.
1.2 · analysis
Financial statements and ratios
Current ratio
current assets ÷ current liabilities
Quick ratio
(current assets − inventory) ÷ current liabilities
Debt-to-capital
D ÷ (D + E)
Interest coverage
EBIT ÷ interest expense
Leverage
net debt ÷ EBITDA
ROIC
NOPAT ÷ invested capital
Days sales outstanding
365 ÷ (sales ÷ average receivables)
Unlevered free cash flow
EBIT × (1 − t) + D&A − capex − ΔNWC
The exam treats the three financial statements as raw material for a valuation, not as an accounting course: know where an item lands and what adjusting it does to EBITDA, free cash flow and the multiple you are about to apply.
Cash flow and inventory
- Depreciation and amortisation are added back in operating cash flow; capex sits in investing; dividends and buybacks sit in financing. Under US GAAP, interest paid is an operating item.
- An increase in net working capital is a use of cash and comes off free cash flow.
- With rising prices, LIFO gives higher cost of goods sold, lower income, lower taxes and a lower inventory balance than FIFO; a LIFO liquidation flatters one year’s margin and should be normalised away. IFRS does not allow LIFO.
Normalised earnings
Normalising reads most like a story problem, and every add-back faces the same test: is the cost truly one-off, and can it be measured? A restructuring charge four years running is a cost of doing business. Stock-based compensation granted every year is a real expense. Synergies a buyer hopes to find belong in a pro forma case, never in historical LTM EBITDA. A goodwill impairment is added back to EBITDA, but it saved no cash tax, so it earns no tax shield.
| Pair | The difference | Where items catch you |
|---|---|---|
| EBIT · EBITDA · EBITDAR | EBITDA adds back depreciation and amortisation; EBITDAR also adds back rent | a coverage ratio defined on EBIT while the table hands you EBITDA |
| ROE · ROA · ROIC | net income over equity; net income over assets; after-tax operating profit over invested capital | ROE rises with leverage, so a geared company can look better run than it is |
| Debt-to-capital · debt-to-equity | D ÷ (D + E) against D ÷ E | 0.5 debt-to-capital is 1.0 debt-to-equity, and both usually appear as options |
| Current · quick ratio | the quick ratio drops inventory from current assets | a retailer with a full warehouse and an empty bank account |
Who is on the other side of the deal
Section 1.2 also covers who the investors, issuers and financings are — from C and S corporations, LLCs, MLPs and REITs to IPOs, follow-ons, PIPEs and forward sales — and the investor tiers come with thresholds. An accredited natural person has income above $200,000 ($300,000 jointly) in each of the last two years, net worth above $1 million excluding the home, or a Series 7, 65 or 82; a qualified institutional buyer owns or invests at least $100 million in securities ($10 million for a broker-dealer). The Series 79 does not make you accredited today; on September 30, 2026 the SEC asked for public comment on adding it.
1.2 · valuation
Valuation methods the exam tests: DCF, comps, precedents
Four methods, one football field. Section 1.2 names DCF, comparable companies and precedent transactions; the buy-side part of Function 3 adds the LBO. The exam tests what each method includes, where its range usually lands, and which numbers belong in it.
| Method | What it values | Control premium? | Usual place on the football field |
|---|---|---|---|
| Trading comps | a minority stake, from peers’ trading multiples | No | middle of the chart; moves with the market |
| Precedent transactions | control, from prices paid in past deals | Yes | usually the highest range |
| DCF | intrinsic value: unlevered free cash flow discounted at WACC | No | wide; most sensitive to terminal assumptions |
| LBO | what a financial sponsor can pay and still earn its target IRR | — | often the floor |
- Share price
- $24.00
- Basic shares
- 50.0m
- Options
- 4.0m, strike $18.00
- Debt
- $400m
- Preferred stock
- $60m
- Non-controlling interest
- $30m
- Cash
- $114m
- Option proceeds = 4.0 × 18.00 = $72.0m, which buys back 72.0 ÷ 24.00 = 3.0m shares
- Net new shares (treasury-stock method) = 4.0 − 3.0 = 1.0m; diluted shares = 51.0m
- Equity value = 51.0 × 24.00 = $1,224.0m
- EV = 1,224.0 + 400 + 60 + 30 − 114 = $1,600.0m
AnswerEnterprise value is $1,600.0m. Adding the cash gives $1,828.0m and using basic shares gives $1,576.0m — exactly the kind of neighbours the exam prints.
Cash is the classic sign error; the runner-up is forgetting that in-the-money options add shares. Equity-method stakes and marketable securities are cousins of cash: their value sits in equity value but their income is not in consolidated EBITDA, so they come out too.
- Peer EV/EBITDA
- 7.8x, 8.2x, 8.5x, 9.1x, 11.6x
- Target reported EBITDA
- $182m
- One-off restructuring charge
- $8m, documented
- Net debt
- $315m
- Diluted shares
- 52.0m
- Median multiple = 8.5x (the mean, 9.04x, is pulled up by the 11.6x outlier)
- Normalised EBITDA = 182 + 8 = $190m
- Implied EV = 190 × 8.5 = $1,615m
- Implied equity value = 1,615 − 315 = $1,300m
- Value per share = 1,300 ÷ 52.0 = $25.00
AnswerAbout $25.00 per share. Dividing the $1,615m EV straight by the share count ($31.06) hands the lenders’ claim to the shareholders.
Every wrong option on a Function 1 item is somebody’s reasonable mistake, printed in advance.
Enterprise value
EV = equity value + debt + preferred + NCI − cash
Treasury-stock method
new shares = ITM options − (options × strike ÷ price)
DCF value
Σ FCF_t ÷ (1 + WACC)^t + TV ÷ (1 + WACC)^n
Gordon growth terminal value
TV = FCF_n × (1 + g) ÷ (WACC − g)
only works while WACC is above g
Exit-multiple terminal value
TV = EBITDA_n × exit multiple
Dividend discount model
P = D_1 ÷ (r − g)
CAGR
(end ÷ start)^(1/n) − 1
1.2 · calculation
Accretion/dilution and cost of capital (worked examples)
Pro forma EPS
(NI acquirer + NI target ± after-tax adjustments) ÷ (acquirer shares + new shares)
New shares issued
price paid ÷ acquirer share price
Earnings yield
EPS ÷ price = 1 ÷ P/E
CAPM
Re = Rf + β × (Rm − Rf)
WACC
E/V × Re + D/V × Rd × (1 − t)
add P/V × Rp when there is preferred stock
Accretion/dilution asks one question: does the buyer’s EPS go up or down after the deal? Pro forma EPS above the acquirer’s stand-alone EPS is accretive; below it, dilutive. Items give you the inputs and want either the percentage or just the direction — and the direction can usually be had before you touch the numbers.
- Acquirer net income
- $300m
- Acquirer shares
- 100m
- Acquirer share price
- $45.00 (P/E 15x)
- Target net income
- $50m
- Price paid for the target’s equity
- $600m (P/E 12x)
- Synergies
- none assumed
- Stand-alone EPS = 300 ÷ 100 = $3.00
- New shares = 600 ÷ 45.00 = 13.33m
- Pro forma EPS = (300 + 50) ÷ (100 + 13.33) = 350 ÷ 113.33 = $3.088
- Change = 3.088 ÷ 3.00 − 1 = +2.9%
AnswerAccretive, by about 2.9% — as the shortcut predicts, since the buyer’s 15x is above the 12x it pays.
Fund the same purchase with $600m of new debt at 7% and a 25% tax rate instead. After-tax interest is 600 × 0.07 × 0.75 = $31.5m, pro forma net income is 300 + 50 − 31.5 = $318.5m on the unchanged 100m shares: EPS of $3.185, about 6.2% accretive. The shortcut agrees — 5.25% after tax against an earnings yield of 50 ÷ 600 = 8.3%.
Cost of capital
- Equity, market value
- $600m
- Debt
- $400m
- Risk-free rate
- 4.0%
- Beta
- 1.2
- Equity risk premium
- 5.5%
- Pre-tax cost of debt
- 6.0%
- Tax rate
- 25%
- Weights: E/V = 600 ÷ 1,000 = 60%; D/V = 40%
- Cost of equity (CAPM) = 4.0% + 1.2 × 5.5% = 10.6%
- After-tax cost of debt = 6.0% × (1 − 0.25) = 4.5%
- WACC = 0.60 × 10.6% + 0.40 × 4.5% = 6.36% + 1.80% = 8.16%
AnswerWACC is 8.16%.
1.3 · due diligence
Due diligence
Section 1.3 is the least arithmetical part of Function 1 and the one where the wording of the options matters most. The standard is the familiar one: a disclosure document must contain no untrue statement of a material fact and must not leave out a material fact needed to keep what it does say from being misleading. Diligence is how a bank shows the work behind that sentence.
Under Section 11 of the Securities Act the issuer is liable for a misstatement in the registration statement whatever care it took; underwriters and directors can defend themselves by showing a reasonable investigation, and Securities Act Rule 176 lists what bears on reasonable. For audited financials the bar is having no reason to believe they were wrong, which is why comfort letters exist. The offering side is in the Function 2 guide.
Sell-side preparation
The seller’s bank builds the data room and checks the numbers it will market, before buyers find the gaps for it.
Buy-side review
The buyer’s team reads the data room and meets management: culture, unfunded liabilities, off-balance-sheet items, and whether the synergies in the price exist.
Bring-down
Close to pricing or closing, diligence is refreshed to confirm that nothing material has changed since the last check.
Sarbanes-Oxley on the outline
- SOX §402
- Bans personal loans from the company to its directors and executive officers.
- SOX §403
- Speeds up Section 16 insider reporting; a Form 4 is due within two business days.
- SOX §404
- Management assesses internal control over financial reporting; the auditor’s attestation under 404(b) applies to accelerated filers.
- Audited numbers reconcile to the model
- Every add-back has documentation behind it
- Unfunded liabilities are counted
- Off-balance-sheet arrangements are found
- The synergies in the price are real
Traps
Common Function 1 traps
These come from the explanations in our Function 1 items, where a handful of slips accounts for most wrong picks. They survive because each one produces a number that looks reasonable.
- Cash added to EV. It is subtracted; debt, preferred and non-controlling interest are added.
- An EV multiple on a levered metric. EV pairs with EBITDA, EBIT or sales; P/E pairs with the share price.
- The level instead of the change. When the stem asks how much a value moves, the answer is the difference, not either value.
- Synergies in LTM EBITDA. Expected savings belong in a pro forma case, not in historical results.
- Recurring costs as add-backs. A charge that returns every year is not one-off, and routine stock-based compensation is a cost.
- Basic shares where diluted were asked. In-the-money options come in through the treasury-stock method, convertibles through if-converted.
- A stale filing. A later 8-K overrides the picture in the last 10-K.
- Gordon growth with g at or above WACC. The formula only works while the discount rate is above growth.
Function 2 has its own list, mostly about timing and wording rather than arithmetic; it is in the Function 2 guide to underwriting and offerings.
Drill
Practice: Function 1 questions
The deal book below holds 12 original Function 1 practice items, one at a time, none repeated elsewhere on the site. Pick an option and the memo opens with the verdict, the reasoning and a note on every option. After a miss, read the note on the option you picked first: on Function 1 it usually names the exact input you used wrongly.
Function 1 drill 12 items
Item 1 of 12
F1 · Data & valuation
A target company's board of directors files a Schedule 14D-9 in response to a hostile tender offer. To justify rejecting the offer, how will the board most likely analyze the bidder's proposed control premium?
Pick A–D (or press 1–4). The reasoning lands here, with a note on every option — including the ones that were only trying to look helpful.
| Function | Outline | Answered | Right | Flagged |
|---|---|---|---|---|
| F1 Data & valuation | 49% | 0/12 | 0 | 0 |
For a mixed run with a per-function ledger, use the 60-item Series 79 practice test and its F1 tab; a four-item taster sits on the home page.
Questions people ask
FAQ
What is on Function 1 of the Series 79?
Collection, analysis and evaluation of data: 37 of the 75 scored items (49%), split into 1.1 collecting data, 1.2 analysis and evaluation (statements, ratios, DCF, comparables, precedents, accretion/dilution, WACC) and 1.3 due diligence.
What formulas do I need for the Series 79?
For Function 1: the enterprise-value bridge, the treasury-stock method, unlevered free cash flow, the DCF with Gordon-growth and exit-multiple terminal values, CAPM and WACC, pro forma EPS, and the main ratios — current, quick, debt-to-capital, coverage, leverage, ROE, ROA and ROIC. The formula boxes on this page carry them, with worked numbers.
Is there a lot of math on the Series 79?
Mostly in Function 1, which is half the scored exam: EV bridges, multiples, terminal values, WACC and accretion/dilution. The arithmetic is short; the difficulty is picking the right inputs. Functions 2 and 3 lean on rules, structures and timing. There is no penalty for guessing, so answer every item.
How is accretion/dilution tested on the Series 79?
As a short case: acquirer and target earnings, a price, a form of payment, and a question about pro forma EPS or simply the direction. All-stock: compare the acquirer’s P/E with the P/E paid. Cash or debt: compare the after-tax cost of funds with the target’s earnings yield. The worked example runs both.
Is the LBO part of Function 1?
Function 1 lists IRR, NPV and the main valuation methods; the LBO is named in the buy-side part of Function 3. Know it as what a financial sponsor can pay and still reach its target IRR — often the floor of a range.
Drill the parts that cost points
The Series 79 practice app has more items like the ones on this page, sorted by outline function and explained option by option.