The cost of capital is the required rate of return that a company should achieve in order to cover the cost of generating funds in the marketplace. The required rate of return is dependent on the creditworthiness and riskiness of the company’s business. If the risk is higher, the investors would lend funds; i.e. invest in a company only if they get higher returns. The cost of capital is equal to the return that the investor receives. In other words, it is the benchmark for measuring the profitability of an investment.