Why continuing residual income is assumed to decline to zero over time based on ROE mean reversion?
It does not say ROE has to revert to the cost of equity over time. ROE may also revert to some mean level which is higher than the cost of equity. In that case, residual income will continue at a positive level rather than decline to zero.
Is a company able to sustain a ROE above its cost of capital or required rate of return (both are the same) on the long-term? Sounds great, but not much likely since mature companies run out of abnormal profitable projects in the long-term. Perhaps this is not 100% true in real life, but at least it is a reasonable assumption (and conservative btw).