Contrast residual income models with free cash flow and dividend discount models

Residual income, dividend and free cash flow models are all present value approaches, and with consistent assumptions they should give the same value. They differ in when value is recognised. Dividend and cash flow models put much of the value in the terminal value, far in the future, where uncertainty is greatest. The residual income model starts with current book value and adds the present value of excess earnings, so more value is recognised immediately and the estimate depends less on the terminal value. Residual income relies on accounting data, so it is exposed to accounting choices, while cash flow models are less so. The trap is thinking the models measure different things, when they allocate the same value differently over time.