Question

How would one define the cost of capital in finance?

2. What is the weighted average cost of capital?

3. Why must the expected return on capital exceed the cost of capital?

Answer 1

Part 1:
Cost of capital is the returns that the investors expect when a company raises capital for the purpose of capital budgeting (like investing in various projects).
There are mostly two type of investors, example: equity investors and debt investors. Normally cost of debt is less than equity because debt is secured and risk involved in debt investing is less as compared to equity investments.

Part 2:
Suppose a company raised a huge amount from both debt investors and equity investors, the cost of capital of both debt and equity will be different. After raising the capital, a company calculates average cost of capital considering the weights or proportion of debt and proportion of equity in the total amount raised.
Weighted average cost of capital=(Proportion of equity)*(Cost of equity)+(Proportion of debt)*(Cost of debt)*(1-tax rate)

Part 3:
Cost of capital is the return that a company pays to its investors, if the expected return is not more then the company will be getting less return from its investments and paying more return to the investors.
Example: Suppose a person invested in fixed deposit in a bank at say x% return, now the bank has to invest the money somewhere and get more return than x% to gain profit else the bank will be in loss if it generates less than x% returns and pays the investors a return of x%.