Which formula is used to solve for the required rate of return of internal equity?

The formula to solve for the required rate of return on internal equity is based on the Capital Asset Pricing Model (CAPM). The correct formula represents this relationship effectively.

In the context of this formula, Kj denotes the required rate of return on the equity, Krf is the risk-free rate of return, Km stands for the expected return of the market, and Bj represents the beta of the stock, which measures its volatility in relation to the market. The key aspect of the model is that it suggests the required return on equity is influenced by both the risk-free rate and the risk premium associated with the stock's market risk.

The correct formula clearly shows that to arrive at the required rate of return on equity, you start with the risk-free rate (Krf) and add the product of the stock's beta (Bj) and the market risk premium (Km - Krf). The market risk premium is the additional return expected from the market over and above the risk-free rate, and multiplying it by the stock’s beta adjusts this premium to reflect the stock's specific risk relationship with the market.

Thus, when the formula is structured this way, it encapsulates both the foundational expected return and the associated risk, leading to a comprehensive understanding of the