Shell Midstream Partners LP (NYSE:SHLX) WACC %

Shell Midstream Partners LP WACC % Calculation

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is commonly referred to as the firm's cost of capital. Generally speaking, a company's assets are financed by debt and equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances.

1. Weights:
Generally speaking, a company's assets are financed by debt and equity. We need to calculate the weight of equity and the weight of debt.
The market value of equity (E) is also called "Market Cap". As of today, Shell Midstream Partners LP's market capitalization (E) is $6221.840 Mil.
The market value of debt is typically difficult to calculate, therefore, GuruFocus uses book value of debt (D) to do the calculation. It is simplified by adding the latest two-year average Short-Term Debt & Capital Lease Obligation and Long-Term Debt & Capital Lease Obligation together. As of Jun. 2022, Shell Midstream Partners LP's latest two-year average Short-Term Debt & Capital Lease Obligation was $200 Mil and its latest two-year average Long-Term Debt & Capital Lease Obligation was $2519.5 Mil. The total Book Value of Debt (D) is $2719.5 Mil.
a) weight of equity = E / (E + D) = 6221.840 / (6221.840 + 2719.5) = 0.6959
b) weight of debt = D / (E + D) = 2719.5 / (6221.840 + 2719.5) = 0.3041

2. Cost of Equity:
GuruFocus uses Capital Asset Pricing Model (CAPM) to calculate the required rate of return. The formula is:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market - Risk-Free Rate of Return)
a) GuruFocus uses 10-Year Treasury Constant Maturity Rate as the risk-free rate. It is updated daily. The current risk-free rate is 4.61200000%. Please go to Economic Indicators page for more information. Please note that we use the 10-Year Treasury Constant Maturity Rate of the country/region where the company is headquartered. If the data for that country/region is not available, then we will use the 10-Year Treasury Constant Maturity Rate of the United States as default.
b) Beta is the sensitivity of the expected excess asset returns to the expected excess market returns. Shell Midstream Partners LP's beta cannot be obtained because it has a price history shorter than 3 years. It will thus be set to 1 as default to calculate WACC.
c) (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium. GuruFocus requires market premium to be 6%.
Cost of Equity = 4.61200000% + 1 * 6% = 10.612%

3. Cost of Debt:
GuruFocus uses last fiscal year end Interest Expense divided by the latest two-year average debt to get the simplified cost of debt.
As of Dec. 2021, Shell Midstream Partners LP's interest expense (positive number) was $85 Mil. Its total Book Value of Debt (D) is $2719.5 Mil.
Cost of Debt = 85 / 2719.5 = 3.1256%.

4. Multiply by one minus Average Tax Rate:
GuruFocus uses the latest two-year average tax rate to do the calculation. The calculated average tax rate is limited to between 0% and 100%. If the calculated average tax rate is higher than 100%, it is set to 100%. If the calculated average tax rate is less than 0%, it is set to 0%.
The latest Two-year Average Tax Rate is 0%.

Shell Midstream Partners LP's Weighted Average Cost Of Capital (WACC) for Today is calculated as:

* For Operating Data section: All numbers are indicated by the unit behind each term and all currency related amount are in USD.
* For other sections: All numbers are in millions except for per share data, ratio, and percentage. All currency related amount are indicated in the company's associated stock exchange currency.

Shell Midstream Partners LP  (NYSE:SHLX) WACC % Explanation