Financial Modeling Tutorials
- Financial Modeling Basics
- What is Financial Modeling?
- Financial Modeling in Excel
- Types of Financial Models
- Financial Modeling Interview Questions
- Alibaba IPO Financial and Valuation Model
- Box IPO Modeling Details
- Box IPO Valuation Model
- Download Alibaba IPO Financial Model
- Financial Modeling Books
- Financial Modeling Templates
- Financial Modeling Course
- Excel Modeling
- Financial Functions in Excel
- Sensitivity Analysis in Excel
- Time Value of Money
- Future Value Formula
- Present Value Factor
- Perpetuity Formula
- Annuity vs Perpetuity
- Internal Rate of Return (IRR)
- NPV vs XNPV
- NPV vs IRR
- NPV Formula
- IRR vs ROI
- Break Even Point
- Payback Period & Discounted Payback Period
- Payback period Formula
- Discounted Payback Period Formula
- Profitability Index
- Cash Burn Rate
- Simple Interest
- Effective Interest Rate
- Loan Amortization Schedule
- Rule of 72
- Geometric Mean Return
- Real Rate of Return Formula
- Continuous compounding Formula
- Weighted average Formula
- Holding Period Return Formula
- Cost Benefit Analysis
- Mortgage APR vs Interest Rate
Weighted Average Formula
The weighted average formula is quite simple, let’s have a look at it –
Here, w = respective weight (in percentage), x = value
Weighted Average Example
Let’s take a simple weighted average example to illustrate how we calculate a weighted avg.
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 weighted average example, we are given both w and x.
Using the weighted average 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 weighted average 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 weighted average 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 weighted average 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 weighted average 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 Calculator
You can use the following Weighted Average Calculator
Weighted Average in Excel (with excel template)
Let us now do the same Weighted Average 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 Weighted Average in Excel template provided.
You can download this weighted avg template here – Weighted Average in Excel Template
This is a guide to Weighted Average Formula, its uses along with practical Weighted Average Example. Here you also find the weighted average calculator along with the downloadable Weighted Average in excel template.