Explain continuing residual income and defend an estimate of it at the forecast horizon in light of the firm's and industry's outlook

Continuing residual income is the residual income expected after the explicit forecast horizon, and the assumption made about it often drives the valuation. Common cases are that it continues at the final level for ever, that it drops to zero at once, that it declines gradually to zero as ROE fades towards r, or that it settles where ROE reaches a long-run industry level. The persistence factor ω captures fading. A low ω suits companies with weak competitive advantages, high payout, extreme accruals or large special items. A high ω suits durable advantages, low payout and modest accruals. The trap is assuming excess returns persist indefinitely for a company in a competitive industry with low barriers to entry.