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 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 2016

	$ million
Revenue	36.5
Cost of sales	(31.6)
Profit before interest and taxation	4.9
Interest	(1.3)
Profit before taxation	3.6
Taxation	(0.5)
Profit attributable to ordinary shareholders	3.1

Dividends paid were $300,000.

STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2016

	$ million	$ million
Non-current assets (at cost less accumulated depreciation)
Land and buildings		3.6
Plant and machinery		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
Voting		1.8
A shares (non-voting)		0.9
Reserves		9.7
Accounts payable due after more than one year: 12% Loan note 2018		2.2
Current liabilities
Trade accounts payable	7.0
Bank overdraft	2.0
		9.0
		23.6

Average performance ratios for the industry sector in which Headwater operates are given below.

Industry sector ratios

Return before interest and tax on long-term capital employed	24%
Return after tax on equity	16%
Operating profit as percentage of sales	11%
Current ratio	1.6:1
Quick (acid test) ratio	1.0:1
Total debt: equity (gearing)	24%
Dividend cover	4.0
Interest cover	4.5
Price/earnings ratio	10.0

REQUIRED:

1. Evaluate the financial state and performance of Headwater by comparing it with that of its industry sector. (14 marks)
2. Discuss the probable reasons why the management of Headwater is considering a stock exchange listing. (8 marks)