Start from what accountants already say the equity is worth, book value, and add the present value of residual income: profit in excess of what shareholders require on that book value. A company earning exactly its cost of equity is worth book. One earning more is worth more, one earning less is worth less.
Book value rolls forward by retained earnings, the clean-surplus relation. The engine fades return on equity so that 75% of today's excess return over the cost of equity disappears by the end of the horizon, a standard assumption that competition erodes abnormal profitability. If residual income is still negative at the end, the terminal value is set to zero rather than capitalizing a permanent shortfall.
The model's strength is that most of the value sits in book value and near-term earnings, which are known, so the terminal value matters far less than in a DCF. It is the accountant's model, and Penman's textbook is its definitive treatment.