Weighted Average Formula (Table of Contents)
Weighted Average Formula
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 1st day of January. And then another 100 shares are issued on the 1st 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 1st 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.
Weighted Average Formula Calculator
You can use the following Weighted Average Calculator
Weighted Average Formula in Excel (with excel template)
Let us now do the same example above in Excel.
This is very simple. You need to provide the values of “X” and “Y”.
You can easily calculate the ratio in the template provided.
You can download this weighted average template here – Weighted Average Excel Template
This is a guide to Weighted Average Formula, its uses along with practical examples. Here you also find the weighted average calculator along with downloadable excel template.
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