Cost of capital refers to the minimum rate of return that a firm must earn on its investment projects to maintain the market value of its shares and satisfy the expectations of its investors. In financial management, it represents the cost incurred by a company in raising funds from various sources such as equity shares, preference shares, debentures, bonds, and retained earnings. It is essentially the opportunity cost of funds, because investors expect a return equivalent to what they could earn elsewhere with similar risk. Therefore, the cost of capital acts as a benchmark for evaluating investment decisions and financial performance. The cost of capital may be specific to each source of finance, such as cost of equity, cost of debt, and cost of preference capital. The cost of equity is the return required by equity shareholders, which is generally higher due to greater risk. The cost of debt is the effective rate of interest payable on borrowed funds, adjusted for tax benefits,