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How Much Should Orville Pay For Wilbur’s Share Of The Business?

Case Study Instructions:

Please help me out
Orville is interested in comparing the value of his ownership interest under each
of the alternatives. He would also like to understand the reasons that the alternatives
yield different values. As he thinks bringing in an individual partner might raise the
probability of successful implementation of the growth plan, he would like to know how
much that probability would have to increase (if at all) to make it the most attractive
financing alternative.
Separate from the value of the airline to Orville, there is also a question of how
much to bid. If Orville offers to buy based on his own valuation, he would, in effect, be
offering the entire gain associated with his strategy to Wilbur. If Wilbur’s plan is to
maintain the status quo of the airline, and not to pursue growth, then Orville believes
Wilbur should be willing to sell for a price that is consistent with maintaining the size of
the airline and its current level of debt financing. On the other hand, if Wilbur has a
higher valued alternative in mind, then he is likely to reject Orville’s offer and buy
Orville out instead. In that case, Orville would like to make his offer high enough to
capture some of the value of Wilbur’s strategy for increasing value.
You need to read through what I upload, all 5 questions are in there.
It's listed in the second and last paragraph of the case, it's the stuff Wilbur wants to understand. They're not explicitly numbered but they are in that paragraph

Case Study Sample Content Preview:

Funding Case
Your Name
Subject and Section
December 4, 2018
1 How much should Orville pay for Wilbur’s share of the business?
First of all, it was stated in the case that both the brothers have been in dispute about the future of the company. On the one hand, Orville aims for the expansion of the company in the recent future. After three years, he said that he is either planning on selling or managing it depending on market conditions. On the other hand, Wilbur wants the company to remain stable over the long run. In consideration of this, Wilbur’s offer to engage in a reciprocal buyout could be computed. The computation and explanation for such is as follows.
The first thing to consider is how the brothers split the interest and how are they paid for their services to their own company. In terms of interest, it was said that each of the brothers have 50% each. This goes the same for their salaries, where each of them earns $110,000. In turn, this means that shares in the company and the fees for their services is negligible in the valuation process. Consequently, since revenue and debt are provided in the case, these would provide the best tools for evaluating the business. The valuation is provided below.
Horizon year = 3 years
Market Value of Debt (MVD);
5 years: $5 million + 9.5% = $5,475,000
3 years: $5 million + 1.9% = $5,095,000
Enterprise Value = market value of equity + market value of debt + minority interest - cash and investments
While there are some data that are missing, by calculating the company’s Enterprise Value (EV) with the MVD and dividing it by 50%, the amount that Orville would have to pay could then be taken.
2 Determine which alternative is most likely to maximize the value of his interest in the venture
In order to determine how he should proceed with buying out his brother’s shares, Orville is contemplating as to whether (1) find another partner, (2) sell the shares to other institutional investors, and (3) use the assets of the business to borrow money (leveraged buyout). In order to determine the best source of funding, it would be best to consider the market condition, performance of the company, and Orville’s desire for the company’s future.
In terms of market conditions, it could be seen that the average price-to-earnings ratio for small public airlines is 14.33. Historically speaking, the average P/E ratio is 15-25 for all industries, which means that the industry is relatively stable CITATION Invnd \l 1033 (Investopedia.com, n.d.). While company’s performance might vary based on the different scenarios that are presented, the book value of debt ($5 million + 9.5% = $5,475,000) could be paid in the fifth year, in the “success” scenario, given that the growth remains equal. In three years, the same formula could be applied;

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