# Weighted average cost of capital capital

One can calculate a weighted average in different ways. Calculation of Weighted Average Investors often compile a position in a stock over several years. Stock prices change daily, so it's tough to keep track of the cost basis on those shares accumulated over a period of years. If an investor wants to calculate a weighted average of the share price he or she paid for the shares, he or she must multiply the number of shares acquired at each price by that price, add those values and then divide the total value by the total number of shares. Weighted Average Calculator Click Here or Scroll Down The weighted average formula is used to calculate the average value of a particular set of numbers with different levels of relevance.

The relevance of each number is called its weight. The weights should be represented as a percentage of the total relevancy. The most common formula used to determine an average is the arithmetic mean formula.

This formula adds all of the numbers and divides by the amount of numbers. However, the weighted average formula looks at how relevant each number is. The percentages in this example would be the weights. The weighted average would be 2. The weighted average formula is a general mathematical formula, but the following information will focus on how it applies to finance.

Use of Weighted Average Formula The concept of weighted average is used in various financial formulas. Weighted average cost of capital WACC and weighted average beta are two examples that use this formula. Another example of using the weighted average formula is when a company has a wide fluctuation in sales, perhaps due to producing a seasonal product.

If the company would like to calculate the average of one of their variable expenses, the company could use the weighted average formula with sales as the weight to gain a better understanding of their expenses compared to how much they produce or sell.

Example of Weighted Average Formula A basic example of the weighted average formula would be an investor who would like to determine his rate of return on three investments.

## Weighted average cost of capital - Wikipedia

Assume the investments are proportioned accordingly: Putting these variables into the formula would be which would return a total weighted average of 3. If the investor had made the mistake of using the arithmetic mean, the incorrect return on investment calculated would have been 4.

This considerable difference between the calculations shows how important it is to use the appropriate formula to have an accurate analysis on how profitable a company is or how well an investment is doing.Weighted average cost of capital, defined as the overall cost of capital for all funding sources in a company, is used as commonly in private businesses as it is in public .