Weighted Average Formula

Weighted Average Formula (Table of Contents)

Weighted Average Formula
Weighted Average Calculator
Weighted Avg Template

Weighted average formula is quite simple, let’s have a look at it –

Here, w = respective weight (in percentage), x = value

Example of Weighted Average Formula

Let’s take a simple example to illustrate how we calculate a weighted average.

Ramen has invested his money into four types of investments. He has invested 10% of his money in Investment A, 20% in Investment B, 30% in Investment C, and 40% in Investment D. The rates of return for these investments are 5%, 10%, 15%, and 20%. Calculate weighted avg of the rates of return Ramen would receive.

In this example, we are given both w and x.

Using the weighted avg formula, we get –

Weighted Avg = w₁x₁+ w₂x₂+ w₃x₃+ w₄x₄
Weighted Avg = 10% * 5% + 20% * 10% + 30% * 15% + 40% * 20% = 0.005 + 0.02 + 0.045 + 0.08 = 15%.

Explanation of Weighted Average Formula

In simple average, we don’t pay heed to the weight. That’s why when we calculate the simple average, the result becomes too generic. However, in the case of wt average, we pay right emphasis on the right weight and we portray the weight in terms of percentages.

If you look at the formula, you would see that the value is being multiplied by the right amount of weight and that is the beauty of wt average.

For example, if we need to find out the average of 10, 13, and 25, in simple average, we will just add three numbers and divide it by 3. Simple average of the above three numbers would be = (10 + 13 + 25) / 3 = 48 / 3 = 16.
If we take the same example with weight; then the result would be quite different. Let’s say that the weight of number 10 is 25%, 13 is 30%, and 25 is 45%. Wt average of the above three numbers of would be = (10 * 25%) + (13 * 30%) + (25 * 45%) = 2.5 + 3.9 + 11.25 = 17.65.

Use of Weighted Average Formula

The usage of the weighted avg is quite broad.

As for example, we can talk about the weighted avg cost of capital. In calculating the weighted avg cost of capital, we take the cost of equity and the cost of debt into account. And depending on the capital structure of the company, we calculate the WACC.

Another example where we use the weighted average cost of capital is the issuance of outstanding shares. Let’s say that a firm has issued 100 shares in the 1^st day of January. And then another 100 shares are issued on the 1^st day of July.

Now, while calculating the outstanding shares available during the year, we will use the weighted avg method. Since first 100 shares are issued in the 1^st January, it would be applicable for the whole year. But the next 100 shares are only issued in the middle of the year; that’s why the next 100 shares would be available only for 6 months. And here would be the calculation of weighted avg of outstanding shares = (100 * 1) + (100 * 0.5) = 100 + 50 = 150.