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.