Answer: attributes most of a stock's value to earnings from earlier periods.

## Explanation The residual income model (RIM) has a key advantage over the dividend discount model (DDM) in that it **attributes most of a stock's value to earnings from earlier periods** rather than relying heavily on terminal value estimates. This is because the RIM can be expressed as: \[ V_0 = B_0 + \sum_{t=1}^{\infty} \frac{RI_t}{(1+r)^t} \] Where: - V₀ = current value - B₀ = current book value - RI_t = residual income in period t Since the current book value (B₀) represents a significant portion of the total value, and residual income tends to decline over time due to competitive forces, a larger proportion of the total value comes from the current book value and near-term earnings rather than distant future terminal values. Option A is incorrect because both models are based on discounting future cash flows or earnings. Option B is incorrect because the RIM is typically LESS sensitive to terminal value estimation than the DDM, since book value anchors the valuation.

Author: LeetQuiz Editorial Team