Consider total assets: 750,000 and liabiltiy 750,000 with stock holders equity 27,0000. and Suppose Lehman's commercial real estate is worth 0 with probability of 0.2 and 39.5 billion with probability of 0.8. Suppose that it has other assets which are definitely worth 594 billion and IMD which is worth 6 billion. Suppose that the face value of debt is 614.5 billion. Starting from the same initial balance sheet as just described, can Lehman set up SpinCo by segregating the commercial real estate assets in a new entity, which has 25% equity and 75% debt? In particular, if the debt is sold by paying down the existing Lehman debt and the equity is made through an equity investment by Lehman, will this accomplish what Lehman is hoping to do? (Hint: set up the initial balance sheet and form the balance sheets of SpinCo and the reformed Lehman balance sheet.) What do your calculations say about the analysis by Sanford Bernstein that "our work in our Monday piece implies that LEH would have to raise $7.5 billion in order to capitalize this spin off adequately and maintain a 20x leverage ratio."?

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Lehman Brothers Spinoff Analysis Initial Balance Sheet Total Assets 750000000 Commercial Real Estate ... View the full answer