Series 79: Collection, Analysis and Evaluation of Data (49%)

Why is Collection, Analysis and Evaluation of Data the most important Series 79 section?

Weight is the first reason. At 49% of the exam, Function 1 carries almost as many questions as Functions 2 and 3 combined (27% and 24%, respectively). No other section comes close. If you’re deciding where to spend the bulk of your study hours, the math already answered that question for you.

Dependency is the second reason. Everything else on the exam builds on this material. You cannot price a public offering (Function 2) without first knowing how to build a financial model and apply a valuation multiple. You cannot run a sell-side auction or write a fairness opinion (Function 3) without the same comparable-company and precedent-transaction skills covered here. Function 1 is the foundation the other two functions stand on, which is part of why FINRA weights it so heavily.

The material itself splits into three building blocks that mirror how a real deal team actually works: gathering the data, analyzing and valuing the company, and diligencing the facts before they go into a document that carries legal liability. This article walks through all three, in that order.

Where do investment bankers source their data?

Before any analysis happens, bankers need raw material. The exam tests whether you know where that material comes from and what each source is good for.

Once gathered, the data itself falls into four categories worth knowing by name: financial data (historical and projected balance sheet, income statement, and cash flow figures), performance data (operating metrics, same-store comps, backlog, churn), issuance data (past securities offerings, including pricing, size, and allocation), and transaction data (recent M&A deals, including the target, acquirer, deal value, multiples paid, and consideration mix).

The Exchange Act filings bankers mine most

The Securities Exchange Act of 1934 governs the ongoing reporting and ownership disclosure that public companies, insiders, and large institutions must make, and bankers lean on these filings constantly.

How research and banking are allowed to talk to each other

Bankers also gather perspective internally, from industry specialists, the syndicate desk, and the research department. The last one carries the heaviest restrictions on the exam. FINRA’s research-analyst-conduct rule requires firms to keep investment banking from supervising or influencing research analysts, bars analyst pay from being tied to specific banking deals, and restricts analyst communications and public appearances around an offering (a quiet period of 10 calendar days after an IPO for managers and co-managers, 3 days for a secondary offering). The point isn’t that banking and research can never talk. It’s that any substantive contact has to run through compliance-chaperoned channels, and a banker pressuring an analyst on a rating or price target crosses the line.

How do bankers analyze and value a company?

This is the densest part of the section, and the part most candidates underestimate walking in. It rests on three financial statements, then layers ratio analysis and valuation methodology on top.

The three statements and how they connect

Every model starts here. The balance sheet shows what a company owns and owes at a point in time: current and long-term assets (cash, receivables, inventory, property and equipment, goodwill) against current and long-term liabilities and stockholders’ equity, tied together by the identity that assets equal liabilities plus equity. The income statement runs from revenue down through cost of goods sold, operating expenses, and taxes to net income. The cash flow statement splits actual cash movement into operating, investing, and financing activity.

The three statements aren’t independent. Net income flows from the income statement into the cash flow statement as the starting point for operating cash flow, and into the balance sheet as an addition to retained earnings. A model that doesn’t tie across all three has an error somewhere.

Liquidity, profitability, and debt-capacity ratios

Once the statements are built, ratios turn raw numbers into comparable signals.

One more pairing worth locking in: LIFO versus FIFO during inflation. LIFO expenses the newest, most expensive inventory first, which raises reported cost of goods sold, lowers reported earnings, and lowers current taxes. FIFO does the opposite: it expenses the oldest, cheapest inventory first, which produces richer reported earnings and a higher tax bill. The gap between what inventory would be valued at under LIFO versus FIFO is called the LIFO reserve, and analysts add it back to make LIFO and FIFO companies comparable.

Valuation methods: comps, precedents, DCF, and LBO basics

This is the densest bucket in the entire section, and it deserves the most rep time.

Beyond the four core methods, a handful of supporting concepts recur throughout the valuation material: enterprise value (equity value plus debt plus preferred stock plus minority interest, minus cash) is the capital-structure-neutral value figure that pairs with EBITDA or sales multiples, while equity value (market cap: price per share times diluted shares) is what a share price and a P/E multiple actually represent. Accretion and dilution analysis asks whether an M&A deal raises or lowers the acquirer’s earnings per share after closing: broadly, a stock-funded deal is accretive if the target’s earnings yield exceeds the acquirer’s own, and a cash-funded deal is accretive if the target’s after-tax earnings exceed the after-tax cost of the debt used to fund it. And when comparing multiples across time, LTM (last twelve months, a trailing actual figure) is more certain than a forward multiple, which depends on projected estimates that vary by source.

How does the exam use ownership data and financing alternatives?

Two smaller but still-tested topics round out the analysis side of Function 1: reading shareholder behavior, and evaluating how a company should raise capital.

Bankers mine the ownership filings covered earlier (Schedule 13D/13G, Form 13F) to gauge ownership concentration (activist stakes, founder holdings, institutional float) and trading behavior (recent accumulation or distribution among major holders). That reading feeds directly into marketing strategy (which institutions to target in a new offering), M&A response planning (likely shareholder vote outcomes, activist pressure), and buyback design.

On the financing side, bankers weigh the full menu of structures before recommending how a company should raise money: debt versus equity versus hybrid securities, public versus private registration channels, and primary issuance (new shares, proceeds to the company) versus secondary sales (existing shares, proceeds to the selling holder). They also need to know their investor universe: QIBs (qualified institutional buyers, generally $100 million or more in securities) qualify for Rule 144A private resales, while qualified purchasers ($5 million for individuals, $25 million for institutions) qualify for a different path, investment in 3(c)(7) private funds. The two thresholds serve different purposes and shouldn’t be treated as interchangeable.

This analytical work eventually turns into a recommendation: comparing alternatives, weighing benefits and risks (cost of capital, dilution, covenant burden, execution risk), and matching the optimal structure to what the company actually needs. That output feeds directly into the pitchbooks and offering materials covered on the underwriting and new financing side of the exam.

What is due diligence, and why does Section 11 anchor it?

Due diligence is the structured process bankers use to identify what must be disclosed, or what must not be misstated, in public and private offering documents and in M&A transaction documents. The legal anchor is Section 11 of the Securities Act of 1933, and it has two prongs that both matter equally.

The reasonable-investigation standard that supports a due-diligence defense comes from Rule 176, which lists the circumstances the SEC weighs when judging whether an underwriter conducted a reasonable investigation and had reasonable grounds for belief in the registration statement. There’s no fixed checklist. The factors include the type of issuer and security and underwriting arrangement involved (a first-time IPO issuer demands deeper digging than a seasoned, well-followed public reporter doing a follow-on), whether the investigator had any relationship with the issuer beyond underwriting, how reasonable it was to rely on the issuer’s officers and experts, how much public information about the issuer was already available, and whether the person had a role in producing any document incorporated by reference.

In practice, diligence work covers financial-information review, business-plan review, management interviews, third-party interviews with vendors, suppliers, and customers, and physical site visits. It also includes bring-down due diligence: a refreshed confirmation, pulled close to the closing date, that the diligence record still holds up. A long gap between signing and closing (a delayed offering, for example) widens that bring-down workload.

Sell-side versus buy-side due diligence in M&A

In an M&A transaction, diligence splits into two roles that run in parallel but point in opposite directions.

Buy-side diligence in particular reaches well past the financial statements. The Series 79 outline explicitly lists governance, culture, labor issues, and off-balance-sheet exposure as substantive areas the buyer’s diligence must cover, alongside cost-saving opportunities available through post-close consolidation or contract renegotiation. A question asking what buy-side due diligence investigates is testing whether you know it extends beyond “check the financials.”

The Sarbanes-Oxley checkpoints diligence has to clear

Three sections of Title IV of the Sarbanes-Oxley Act create specific, testable diligence checkpoints.

How does the exam actually test this material?

Mostly through applied scenarios rather than bare definitions. A question will describe a data-sourcing situation, hand you a set of financial figures to compute a ratio or multiple from, or lay out a diligence fact pattern and ask what standard applies or which party’s workstream it describes. Because Function 1 leans on real calculation more than the exam’s other two sections, expect some genuine arithmetic (a WACC calculation, an EV build, an EBITDA-multiple comparison) alongside the conceptual recall.

The most efficient way to prepare is to drill practice questions in this section specifically, work through every calculation by hand at least once instead of trusting memorized shortcuts, and review the explanation on every miss. Once you can predict which comp set or valuation method a scenario calls for before reading the answer choices, you’re in good shape. From here, the natural next steps are Underwriting and New Financing Transactions, which is where this same valuation and modeling work gets applied to pricing a live offering, and Mergers and Acquisitions, Tender Offers and Financial Restructuring, which leans directly on the comps, precedents, and due-diligence material covered here.

When you want to test yourself, the Series 79 practice test leans into Function 1 questions, since they make up nearly half the real exam. If you’re still weighing prep options, see the Series 79 exam prep comparison, and if you haven’t already, what is a Series 79 license and why candidates fail the Series 79 cover the exam-wide context this section sits inside.