Royal Dutch Shell - WACC Analysis

Royal Dutch Shell (Weighted Average Cost of Capital (WACC) Analysis)



Helpful Information for Royal Dutch Shell's Analysis

What is the WACC Formula? Analyst use the WACC Discount Rate (weighted average cost of capital) to determine Royal Dutch Shell's investment risk. WACC Formula = Cost of Equity (CAPM) * Common Equity + (Cost of Debt) * Total Debt. The result of this calculation is an essential input for the discounted cash flow (DCF) analysis for Royal Dutch Shell. Value Investing Importance? This method is widely used by investment professionals to determine the correct price for investments in Royal Dutch Shell before they make value investing decisions. This WACC analysis is used in Royal Dutch Shell's discounted cash flow (DCF) valuation and see how the WACC calculation affect's Royal Dutch Shell's company valuation.

WACC Analysis Information

1. The WACC (discount rate) calculation for Royal Dutch Shell uses comparable companies to produce a single WACC (discount rate). An industry average WACC (discount rate) is the most accurate for Royal Dutch Shell over the long term. If there are any short-term differences between the industry WACC and Royal Dutch Shell's WACC (discount rate), then Royal Dutch Shell is more likely to revert to the industry WACC (discount rate) over the long term.

2. The WACC calculation uses the higher of Royal Dutch Shell's WACC or the risk free rate, because no investment can have a cost of capital that is better than risk free. This situation may occur if the beta is negative and Royal Dutch Shell uses a significant proportion of equity capital.