The cost of capital refers to the total expense a company incurs to finance its operations and investments. This includes the cost of debt, which is the interest paid on loans, and the cost of equity, which is the return expected by shareholders. Essentially, it represents the minimum return a company must earn to satisfy its investors and maintain its value. Understanding the cost of capital is crucial for businesses when making decisions about new projects or investments. If the expected return on a project is higher than the cost of capital, it can create value for the company. Conversely, if the return is lower, it may lead to financial losses and decreased investor confidence.