Firms obtain capital from two kinds of sources: lenders and equity investors.
Knowing a firm's cost of capital is needed in order to make better decisions.
Such decisions can be made after quantitative analysis that typically uses a firm's cost of capital as a model input.
They naturally require an extra reward as an incentive to place their capital in a riskier investment instead of a safer one.
Finance theory (and practice) offers various models for estimating a particular firm's cost of equity: