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Livhuwani responds to Ndzalis observation: The economy appears to be weakening, but I believe this has already been priced into the market. The JSE All-share index is currently at 4760. Inflation is low and corporate earnings of the JSE All-share index constituents are ZAR 5180. The dividend yield (on a trailing annual basis) is 3.5% and I expect the dividend growth rate to be constant at 5%. With the risk-free rate at 2%, if I assume a 6% equity risk premium, the dividend discount model indicates that the equity market is undervalued at these levels. Required: i. Calculate the intrinsic value of the JSE All-share index using the constant growth dividend discount model of market valuation and the information provided by Livhuwani. Show your workings. (3 marks) ii. Highlight two weaknesses of the constant growth dividend discount model that you have used in part (i) above. (2 marks) iii. Suggest an improvement to the constant growth dividend discount model and explain how the suggested improvement addresses some or all of the weaknesses highlighted in part (ii) above. (3 marks) d. Several domestic economic fundamentals including inflation, interest rates, and industrial production, are believed by researchers to have the ability to explain domestic stock prices. Briefly explain how each of these three factors might affect stock prices. (6 marks)

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