Cost of capital is the price a company pays for using other people's money. Debt holders want interest payments; equity holders want returns. The combined cost of satisfying both — weighted by their proportions — is the cost of capital (essentially WACC). Any project must earn above this rate to create shareholder value.
Components: cost of debt (interest rate × (1 − tax rate)) is straightforward — look at the company's borrowing rate. Cost of equity (CAPM: Risk-Free Rate + Beta × Market Risk Premium) is trickier — equity holders do not get a fixed return, so their expected return must be estimated using models like CAPM.
A company with a 10% cost of capital that invests in a project returning 8% is destroying shareholder value — even though the project is profitable. This is why cost of capital is called the hurdle rate. In India, companies like TCS (low risk) have lower cost of capital than startups (high risk) — directly impacting which projects each can profitably pursue.