Lehman Formula
The Lehman formula is a compensation formula developed by Lehman Brothers to determine the commission on investment banking or other business brokering services. Lehman Brothers developed the Lehman Formula, also known as the Lehman Scale Formula, in the 1960s while raising capital for corporate clients.
Definition: The Lehman Formula is a compensation formula developed by Lehman Brothers in the 1960s, primarily used to determine commissions for investment banking or other brokerage services. It is also known as the Lehman Scale Formula.
Origin: The Lehman Formula originated in the 1960s when Lehman Brothers developed it to help corporate clients raise funds. The creation of this formula marked the standardization and systematization of commission calculations in the investment banking industry.
Categories and Characteristics: The basic form of the Lehman Formula is: Commission = 5% × First $1 million + 4% × Second $1 million + 3% × Third $1 million + 2% × Fourth $1 million + 1% × Amount over $4 million.
- Characteristics: The formula is simple and easy to calculate, suitable for transactions of various sizes.
- Application Scenarios: Mainly used in investment banking services such as mergers and acquisitions, and financing.
- Pros and Cons: The advantage is its simplicity in calculation; the disadvantage is that for very large transactions, the commission may seem too high.
Specific Cases:
- Case 1: A company needs to raise $5 million. According to the Lehman Formula, the commission is: 5% × $1,000,000 + 4% × $1,000,000 + 3% × $1,000,000 + 2% × $1,000,000 + 1% × $1,000,000 = $50,000 + $40,000 + $30,000 + $20,000 + $10,000 = $150,000.
- Case 2: Another company needs to raise $10 million. According to the Lehman Formula, the commission is: 5% × $1,000,000 + 4% × $1,000,000 + 3% × $1,000,000 + 2% × $1,000,000 + 1% × $6,000,000 = $50,000 + $40,000 + $30,000 + $20,000 + $60,000 = $200,000.
Common Questions:
- Question: Is the Lehman Formula applicable to all types of transactions?
Answer: The Lehman Formula is mainly applicable to investment banking services such as mergers and acquisitions and financing. For other types of transactions, the formula may need to be adjusted or other calculation methods may be used. - Question: Is the commission calculated by the Lehman Formula too high?
Answer: For small-scale transactions, the commission calculated by the Lehman Formula is relatively reasonable. However, for very large transactions, it may seem too high and may need to be adjusted based on specific circumstances.
