“The residual income model makes assumptions about future earnings and dividend growth, whereas the dividend discount model makes assumptions only about dividend growth.”
Question asks for the incorrect statement which is what I posted above.
Explanation: “Statement 3 is the least accurate. The residual income model does not make assumptions about future earnings and dividend growth.”
Excerpt from the reading states:
“In general, the residual income model makes no assumptions about future earnings and dividend growth. If constant earnings and dividend growth are assumed, a version of the residual income model that usefully illustrates the fundamental drivers of residual income can be derived.”
How is the constant earnings and dividend growth mentioned above not an assumption?