QUESTION 1 It is now August 2016. In 2010, the current management team of Headwater, a manufacturer of car and motorcycle parts, bought the company from its conglomerate parent company in a management buyout (MBO) deal. Six years on, the managers are considering the possibility of obtaining a listing for the company's shares on the stock market. The following information is available. HEADWATER INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 20X6 Turnover Cost of sales Profit before interest and taxation Interest Profit before taxation Taxation Profit attributable to ordinary shareholders Dividends Retained profit $ million 36.5 (31.6) 4.9 (1.3) 3.6 (0.5) 3.1 (0.3) 2.8 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X6 $ million Non-current assets (at cost less accumulated depreciation) Land and buildings Plant and machinery $ million 3.6 9.9 13.5 Current assets Inventories 4.4 Accounts receivable 4.7 Cash at bank 1.0 10.1 23.6 Ordinary $1 shares Reserves 2.7 9.7 Accounts payable due after more than one year: 12% Debenture 20X8 Bank Loan Current liabilities Trade accounts payable 2.0 2.2 4.2 7.0 23.6 Note: 85% (round to I decimal place) of Accounts receivables relates to Trade receivables. Average performance ratios for the industry sector in which Headwater operates are given below. 8 | IBF i. Industry sector ratios Return on (long term) capital employed 24% ii. Return after tax on equity (ROE) 16% iii. Operating profit as percentage of sales 11% iv. Current ratio 1.6:1 V. Quick (acid test) ratio 1.0:1 vi. Total debt: equity (gearing) 24% vii. Dividend cover 4.0 viii. Interest cover 4.5 ix. Trade Creditors/Payables Collection Period 60 days 35 days x. Trade Debtors/Receivables Collection Period Required: Calculate ten (10) ratios in accordance with the industry sector ratios provided above and comment on them. [10 marks]