Propose Solutions for Negotiations with Thyestean

DEPARTMENT OF ACCOUNTANCY

UNIVERSITY OF ILLINOIS

MEMORANDUM

TO: Samuel Kaplan Chairman of the Board, CEO, CFO, Controller

FROM:

DATE: September 11, 2007

SUBJECT: Propose solutions for negotiations with Thyestean

Introduction

The purpose of this memo is to explain the valuation discrepancy between yourself and Thyestean concerning Sky Air INC. The memo will help you prepare for negotiations by explaining why the valuations differ and offering solutions to bridge the $14 million gap between their offering price and your asking price.

Principal-Agent Relationships

Currently, you are the principal and have sole decision making rights of Sky Air, INC, under the existing proposal you would retain these rights and transfer 30% of the ownership to Thyestean Venture Capital. Consequently through this transaction, the company would remain very centralized in its decision making structure.

Explanation of Valuation Differences

Due to information asymmetry neither party has been able to agree on a value for 30% of Sky Air, INC. There are several reasons why Thyestean offered a much lower price. First, Thyestean gains no decision making rights, and you are in charge of every aspect of the company. Without decision making rights, Thyestean cannot ensure that the company will pursue the most profit maximizing activities.

Second, without offering any decision making rights to Thyestean there is no way they can control moral hazard. A valuation difference exists because of a concern with potential perk consumption regarding the purchase of a company jet. As sole proprietor you would choose not to purchase a jet, however as a partner with Thyestean it would be in your best interests, but not those of the corporation, to purchase the jet (the situation is outlined in table A).

Third, the operating expenses in the company have continued to increase every year, cutting profits. During your previous expansion you purchased used aircrafts to cut costs, but old machinery has a lower market value and will not last as long as newer aircrafts. This increases the uncertainty of future expenses.

Fifth, you have not provided current or future plans for expansion of Sky Air, INC. Thyestean