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Reading 49  Equity Valuation: Concepts and Basic Tools (Intro)
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Analysts gather and process information to make investment decisions, including buy and sell recommendations. What information is gathered and how it is processed depend on the analyst and the purpose of the analysis. Technical analysis uses such information as stock price and trading volume as the basis for investment decisions. Fundamental analysis uses information about the economy, industry, and company as the basis for investment decisions. Examples of fundamentals are unemployment rates, gross domestic product (GDP) growth, industry growth, and quality of and growth in company earnings. Whereas technical analysts use information to predict price movements and base investment decisions on the direction of predicted change in prices, fundamental analysts use information to estimate the value of a security and to compare the estimated value to the market price and then base investment decisions on that comparison.

This reading introduces equity valuation models used to estimate the intrinsic value(synonym: fundamental value) of a security; intrinsic value is based on an analysis of investment fundamentals and characteristics. The fundamentals to be considered depend on the analyst’s approach to valuation. In a top-down approach, an analyst examines the economic environment, identifies sectors that are expected to prosper in that environment, and analyzes securities of companies from previously identified attractive sectors. In a bottom-up approach, an analyst typically follows an industry or industries and forecasts fundamentals for the companies in those industries in order to determine valuation. Whatever the approach, an analyst who estimates the intrinsic value of an equity security is implicitly questioning the accuracy of the market price as an estimate of value. Valuation is particularly important in active equity portfolio management, which aims to improve on the return–risk trade-off of a portfolio’s benchmark by identifying mispriced securities.

This reading is organized as follows. Section 2 discusses the implications of differences between estimated value and market price. Section 3 introduces three major categories of valuation model. Section 4 presents an overview of present value models with a focus on the dividend discount model. Section 5 describes and examines the use of multiples in valuation. Section 6 explains asset-based valuation and demonstrates how these models can be used to estimate value. Section 7 states conclusions and summarizes the reading.

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Jerri Todd

Todd: So I’m here in Bangkok with Jerri and she is Thai. And, Jerri, I thought we would talk about Thai islands.

Jerri: Of course.

Todd: So there are some major islands. Can you first talk about the major resort islands in Thailand?

Jerri: Yes. So as most of you know, Thailand is probably visited because of its islands. So the most well-known ones would be Phuket and Koh Samui, which are both down South in Surat Thani. And yeah, I think those are like the main destinations. They have changed quite a lot since the last 10 years. It’s quite developed, so it’s an island where, you know, if you really want like a very nice resort and have like a convenient place, like malls are everywhere. There’s also like international schools so a lot of people now move to live at Phuket or Koh Samui. It’s like a little Bangkok but by the beach.

Todd: Oh, really? Wow. And Phuket really developed quickly after the terrible tsunami, right? So it’s really rebounded and now it’s quite vibrant. Correct?

Jerri: Yes, yes, yes. Correct, yeah.

Todd: Okay. So both Samui and Phuket are the more traditional maybe tourist package islands.

Jerri: Yes.

Todd: Are there some smaller islands or less known islands that you would recommend?

Jerri: Yes. We have a lot of islands in Thailand. Just near Koh Samui, you have Koh Phangan, which is also known for its full moon party. That is the high season , but Koh Phangan is actually really nice apart from the full moon. If you visit the other less well-known beaches, Hat Rin, which is where the full moon party happens. There’s a lot of hidden beaches that is very quiet, very relaxed, and it’s not as developed as Koh Samui so you still feel that island lifestyle. There’s a lot of small businesses, local shops.

Todd: Oh, that sounds nice. You know, I actually have not been to Koh Phangan but I’ve been to Koh Tao. And that’s the diving island, correct?

Jerri: Yes, yes, yes.

Todd: Yeah. Can you talk about that?

Jerri: Yes, of course. So Koh Tao is known for its crystal clear water and corals for diving, so a lot of people go there to get their diving certificate. That’s actually the best place to do it. And you can spend like three days there, do the course, and then the island itself is also quite remote. So there’s a few stores, not as much as in Koh Phangan. But yeah, it’s nice and quiet, and…

Todd: Oh, that’s beautiful. There’s some other ones too, right? So there’s Koh Chang. Can you talk about that?

Jerri: Yes. Koh Chang is closer to Bangkok so you can drive there. It takes about five hours. It’s in Trat Province. Koh Chang is a big, big island. And yeah, some people like it, some people don’t, because it’s less vibrant , I would say, compared to like Koh S

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ELLLO Views #1516
ELLLO Views #1516 Audio Lessons Video Lessons Views #1516 | Intermediate 5 Thai Island Life Jerri explains the features of many of Thailand's islands. Script Vocab Quiz Jerri Todd Todd: So I’m here in Bangkok with Jerri and she is Thai. And, Jerri, I thought we would talk about Thai islands. Jerri: Of course. Todd: So there are some major islands. Can you first talk about the major resort islands in Thailand? Jerri: Yes. So as most of you know, Thailand is probably visited because of its islands. So the most well-known ones would be Phuket and Koh Samui, which are both down South in Surat Thani. And yeah, I think those are like the main destinations. They have changed quite a lot since the last 10 years. It’s quite developed, so it’s an island where, you know, if you really want like a very nice resort and have like a convenient place, like malls are everywhere. There’s also like international schools so a lot of people now move to live at Phuket or Koh Samui. It’s like a little Bangkok but by the beach. Todd: Oh, really? Wow. And Phuket really developed quickly after the terrible tsunami, right? So it’s really rebounded and now it’s quite vibrant. Correct? Jerri: Yes, yes, yes. Correct, yeah. Todd: Okay. So both Samui and Phuket are the more traditional maybe tourist package islands. Jerri: Yes. Todd: Are there some smaller islands or less known islands that you would recommend? Jerri: Yes. We have a lot of islands in Thailand. Just near Koh Samui, you have Koh Phangan, which is also known for its full moon party. That is the high season, but Koh Phangan is actually really nice apart from the full moon. If you visit the other less well-known beaches, Hat Rin, which is where the full moon party happens. There’s a lot of hidden beaches that is very quiet, very relaxed, and it’s not as developed as Koh Samui so you still feel that island lifestyle. There’s a lot of small businesses, local shops. Todd: Oh, that sounds nice. You know, I actually have not been to Koh Phangan but I’ve been to Koh Tao. And that’s the diving island, correct? Jerri: Yes, yes, yes. Todd: Yeah. Can you talk about that? Jerri: Yes, of course. So Koh Tao is known for its crystal clear water and corals for diving, so a lot of people go there to get their diving certificate. That’s actually the best place to do it. And you can spend like three days there, do the course, and then the island itself is also quite remote. So there’s a few stores, not as much as in Koh Phangan. But yeah, it’s nice and quiet, and… Todd: Oh, that’s beautiful. There’s some other ones too, right? So there’s Koh Chang. Can you talk about that? Jerri: Yes. Koh Chang is closer to Bangkok so you can drive there. It takes about five hours. It’s in Trat Province. Koh Chang is a big, big island. And yeah, some people like it, some people don’t, because it’s less vibrant, I would say, compared to like Koh Samui or Phuket. But there’s a lot of big resorts there and the beach is also really beautiful. Todd: Yeah, I have to confess. It’s my favorite island by far. Jerri: Yeah, yeah. Todd: So I first went there 25 years ago and it was really quiet then. I mean, incredibly quiet. And the movie came out, The Beach. Jerri: Right. Todd: I remember when I saw that movie, I’m like, “Oh, that’s Koh Chang.” There was nothing to do on the island, and so that’s… It’s beautiful. It’s a natural park, correct? Jerri: Yes, yes. Correct, yeah. Todd: There’s another little one near Bangkok called Koh Samet, correct? Jerri: Right. Yes, yes. That’s a very popular one, especially for Thais to go during the weekend. It’s like a two-hour drive from Bangkok, in Chonburi Province. All you do is you drive there and then you take a quick boat, about 30 minutes. It’s also a national park so there’s entrance fee, but it’s really nice. The beaches are smaller but there’s like different beaches and a recommended activity would be just to rent a bike and then drive around the island. Takes about like a half a day but all the beaches have their own unique character, which is nice to see. Todd: Oh, that’s so awesome. Actually, when I was there years ago, I don’t think they had the road around the island. Jerri: Yeah. Todd: But I remember they had… It was just amazing, beautiful beaches. Jerri: Yeah. Todd: So there’s two more that are quite famous or one that’s very famous, and that’s Koh Phi Phi. That’s way down in the South. And there’s also Koh Lanta which is not too far away, I think, as well. So can you talk about those? Jerri: Yes. These two I haven’t visited. I don’t remember visiting them but I know a lot of people go there for its clear water. And Koh Phi Phi, I believe, has the well-known sand in the middle of the ocean that you can walk across one island to the other, and it’s known for taking a boat and the water is very clear. And Koh Lanta… Yeah, Koh Lanta, I think it’s also known for the same reason as Koh Phi Phi, for its crystal clear water and there’s beautiful resorts there, too. Todd: Great. Okay, so I’m going to put you on the spot. If you had to choose one island to visit, recommend one place, where would you go? Jerri: Koh Phangan. Todd: Koh Phangan! Jerri: Without thinking, yes. Absolutely, yes. Todd: Really? And why? Jerri: It’s always… It’s a place that feels like home to me because my mom is there, as well. So we know the locals, which makes a difference. And also, I think the island hasn’t – you know, it’s not developed but there’s also like things to see and you really feel like you’re on holiday, really feel like you’re going on an adventure. Todd: Oh, man. I think I want to go there right now. Jerri: Yeah. Todd: I’m serious. I have a week and I’m like, “I’m going to go an island!” Learn vocabulary from the lesson! tourist package Your browser does not support the audio element. Samui and Phuket are tourist package islands. A tourist package will take tourists to