The cost of capital for a company is the rate of return for the investors or the bond holders. This is the require rate of interest that the investors expect and the basis on which they would be willing to provide capital to the company to carry on its projects.
For example- the company needs money to buy an asset. They would raise this money or capital either by issuing shares or debentures. Let’s say Rs. 10 lac was raised by the company using debt with a term of 10 years @ 5% interest per annum. Therefore the total interest company would be paying to the debenture holder throughout the tenure of the debt would be Rs. 5,00,000/-. So this 5,00,000/- or 5% is the cost of capital for the company
In equity, however, there is no fixed rate of return. Shareholders are given dividends but that is not statutorily mandated.
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