weighted average

Examples of weighted average in the following topics:

• Weighted Average Cost of Capital

  • The WACC is the cost of capital taking into account the weights of each component of a company's capital structure.
  • The weighted average cost of capital (WACC) is the rate a company is expected to pay, on average, to its security holders.
  • Stated differently, the return on capital of a new project must be greater than the weighted average cost of capital.
  • Since companies raise money using any number and combination of these sources - i.e. debt, common stock, preferred stock, retained earnings - it is important to calculate the cost of capital taking into account the relative weights of each component of a company's capital structure.

• Inventory Techniques

  • Average cost method is quite straightforward.
  • It takes the weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory.
  • There are two commonly used average cost methods: Simple weighted average cost method and moving average cost method.
  • This gives a Weighted Average Cost per Unit.
  • Finally, this amount is multiplied by Weighted Average Cost per Unit to give an estimate of ending inventory cost.

• Making Risk Adjustments

  • The weighted average cost of capital is the minimum return that a company must earn on an existing asset base.
  • A company itself will be considered, for investment purposes, as a "portfolio of assets," and its beta coefficient will represent the weighted average of each "asset's" beta.
  • Therefore, if a new project of differing risk is undertaken, the beta for that project will be weighted into the company's overall cost of capital.
  • This will increase the risk premium on the project and its cost of equity and subsequently the weighted average cost of capital.

• Calculating Expected Portfolio Returns

  • A portfolio's expected return is the sum of the weighted average of each asset's expected return.
  • The return of our fruit portfolio could be modeled as a sum of the weighted average of each fruit's expected return.
  • W is weight and E(RX) is the expected return of X.

• Inventory Costs

  • Inventory costs depends on methods used, which include Specific Identification, Weighted Average Cost, Moving-Average Cost, FIFO, and LIFO.
  • Weighted Average Cost is a method of calculating Ending Inventory cost.
  • This gives a Weighted Average Cost per Unit.
  • Finally, this amount is multiplied by Weighted Average Cost per Unit to give an estimate of ending inventory cost.
  • Moving-Average (Unit) Cost is a method of calculating Ending Inventory cost.

• Duration

  • Duration is the weighted average of the times until fixed cash flows of a financial asset are received.
  • In finance, the duration of a financial asset that consists of fixed cash flows, for example a bond, is the weighted average of the times until those fixed cash flows are received.
  • The dual use of the word "duration" in the Macaulay duration and the modified duration, as both the weighted average time until repayment and as the percentage change in price, often causes confusion.
  • The Macaulay duration is the name given to the weighted average time until cash flows are received and is measured in years.
  • The Macaulay duration is the name given to the weighted average time until cash flows are received and is measured in years.

• The Weightings

  • To calculate the weighted average cost of capital (WACC) we must take into account the weight of each component of a company's capital structure.
  • The "weighting" varies based on how the company finances its activities.
  • If the value of the company's equity exceeds its debt, the cost of its equity will have more weight.
  • Since we are measuring expected cost of new capital, the calculation of weighted average cost of capital usually uses the market values of the various components rather than their book values.
  • Define how a company's weighted average cost of capital is weighted

• Calculating Diluted Earnings per Share

  • Sun Microsystems, Inc. has 3,417,000,000 weighted-average common shares outstanding with income available to common shareholders of USD 922,590,000 during a recent year.
  • The basic earnings per share formula involves taking the income available for common shareholders (net income minus preferred stock dividends), divided by the weighted average number of common shares outstanding.
  • Dilutive common shares from dilutive instruments, such as stock options or stock warrants, are added to the basic equation's denominator (weighted average number of shares outstanding), which decreases the ending result of earnings per share.

• The Cost of Debt

  • The cost of debt is a component of the weighted average cost of capital (WACC) and is composed of the rate of interest paid.
  • When we speak of the cost of debt in reference to the weighted average cost of capital (WACC), we are generally referring to corporate bonds.

• Implications for Expected Returns

  • The expected return of a diversified portfolio is the expected return of each of its underlying investments times the weight the investment receives.
  • Asset allocation is the theory that any portfolio should have a set of target weights for different asset classes based on time frame and risk tolerance.
  • Let's make this very simple and say that bonds return 4% in a bad year, 6% in an average year, and 8% in a good year, and stocks return -5% in a bad year, 10% in an average year, and 15% in a good year.
  • Look at how the different asset mixes fare, based on a 10-year period that is consistent with historical averages.
  • Different returns are expected for different asset allocations given historical averages