Question

Sun Microsystems is a leading supplier of computer-related products, including servers, workstations, storage devices, and network switches. In 2009, Sun Microsystems was acquired by Oracle Corporation.

In the letter to stockholders as part of the 2001 annual report, President and CEO Scott G. McNealy offered the following remarks:

Fiscal 2001 was clearly a mixed bag for Sun, the industry, and the economy as a whole. Still, we finished with revenue growth of 16 percent—and that's significant. We believe it's a good indication that Sun continued to pull away from the pack and gain market share. For that, we owe a debt of gratitude to our employees worldwide, who aggressively brought costs down—even as they continued to bring exciting new products to market.

The statement would not appear to be telling you enough. For example, McNealy says the year was a mixed bag with revenue growth of 16 percent. But what about earnings? You can delve further by examining the income statement in Exhibit 4. Also, for additional analysis of other factors, consolidated balance sheet(s) are presented in Exhibit 5.

Exhibit 1

	2001 Dollars	2000 Dollars	1999 Dollars	1998 Dollars
Net revenues	$ 18,625	$ 15,727	$ 11,780	$ 9,884
Costs and expenses:
Cost of sales	$ 10,038	$ 7,548	$ 5,664	$ 3,885
Research and development	2,014	1,629	1,268	1,022
Selling, general and administrative	4,543	4,071	3,188	2,800
Goodwill amortization	263	65	19	0.5
In-process research and development	80	9	119	179
Total costs and expenses	$ 16,938	$ 13,322	$ 10,258	$ 7,886.5
Operating Income	$ 1,687	$ 2,405	$ 1,522	$ 1,997.5
Gain (loss) on strategic investments	$ -93	$ 205	-	-
Interest income, net	$ 359	$ 171	$ 85	$ 48
Litigation settlement	-	-	-	-
Income before taxes	$ 1,953	$ 2,781	$ 1,607	$ 2,045.5
Provision for income taxes	$ 1,148.25	$ 1,021.32	$ 656.09	$ 1,252.25
Cumulative effect of change in accounting principle, net	$ -55	-	-	-
Net income	$ 859.75	$ 1,759.68	$ 950.91	$ 793.25
Net income per common share-diluted	$ 0.25	$ 0.52	$ 0.29	$ 0.25
Shares used in the calculation of net income per common share-diluted	3,439	3,384	3,279	3,173

Exhibit 2

Assets	2001	2000
Current assets:
Cash and cash equivalents	$ 1,473	$ 1,851
Short-term investments	386	622
Accounts receivable, net allowances of $410 in 2001 and $534 in 2000	2,953	2,697
Inventories	1,051	552
Deferred tax assets	1,088	671
Prepaids and other current assets	973	481
Total current assets	7,924	6,874
Property, plant and equipment, net	2,692	2,100
Long-term investments	4,676	4,495
Goodwill, net of accumulated amortization of $349 in 2001 and $88 in 2000	2,041	167
Other assets, net	834	519
	18,167	14,155
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings	4	6
Accounts payable	1,041	929
Accrued payroll-related liabilities	490	750
Accrued liabilities and other	1,371	1,157
Deferred revenues and customer deposits	1,821	1,292
Warranty reserve	316	213
Income taxes payable	94	216
Total current liabilities	5,137	4,563
Deferred income taxes	742	575
Long-term debt and other obligations	1,703	1,715
Total debt	7,582	6,853
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 10 shares authorized (1 sahre which has been designated as Series A Preferred participating stock): no shares issued and outstanding	-	-
Common stock and additional paid-in-capital, $0.00067 par value, 7,200 shares authorized; issued: 3,536 shares in 2001 and 301 shares in 2000	6,238	2,726
Treasury stock, at cost: 288 shares in 2001 and 301 shares in 2000	-2,436	-1,438
Deferred equity compensation	-73	-17
Retained earnings	6,884	5,953
Accumulated other comprehensive income (loss)	-28	78
Total stockholders' equity	10,585	7,302
	18,167	14,155

Part A

Referring to Exhibit 1, compute the annual percentage change in net income per common share-diluted (second numerical line from the bottom) for 1998–1999, 1999–2000, and 2000–2001.

Rate of change, 1998 to 1999:

Rate of change, 1999 to 2000:

Rate of change, 2000 to 2001:

Part B

Also in Exhibit 1, compute net income/net revenue (sales) for each of the four years. Begin with 1998.

1998 Profit Margin:

1999 Profit Margin:

2000 Profit Margin:

2001 Profit Margin:

Part C

Compute return on stockholders’ equity for 2000 and 2001 using data from Exhibits 1 and 2.

2000 Return on Stockholders' Equity:

2001 Return on Stockholders' Equity:

Part D

Analyze your results to Question 2 more completely by computing ratios 1, 2a, 2b, and 3b (all from this chapter) for 2000 and 2001. Actually, the answer to ratio 1 can be found as part of the answer to question 2, but it is helpful to look at it again.

	Ratio	2000	2001
	1
	2a
	2b

Part E

The average stock prices for each of the four years shown in Exhibit 1 were as follows:

1998          11¼

1999          16¾

2000          28½

2001          9½

Compute the price/earnings (P/E) ratio for each year. That is, take the stock price shown above and divide by net income per common stock-dilution from Exhibit 1.

1998 P/E Ratio:

1999 P/E Ratio:

2000 P/E Ratio:

2001 P/E Ratio:

Answer 1

Since it is not mentioned which parts of the question to be solved, I am solving Part A and part B.

Part A:

	2001	2000	1999	1998
Net income per common share-diluted	$ 0.25	$ 0.52	$ 0.29	$ 0.25

Rate of change, 1998 to 1999= (Net income per common share diluted for 1999- Net income per common share diluted for 1998)/ Net income per common share diluted for 1998 =(0.29-0.25)/0.25= 0.16 or 16%

Rate of change, 1999 to 2000: (Net income per common share diluted for 2000- Net income per common share diluted for 1999)/ Net income per common share diluted for 1999=(0.52-0.29)/0.29=0.79 or 79%

Rate of change, 2000 to 2001: (Net income per common share diluted for 2001- Net income per common share diluted for 2000)/ Net income per common share diluted for 2000= (0.25-0.52)/0.52= -0.52 or -52%.

Part B:

	2001	2000	1999	1998
Net revenues	$ 18,625	$ 15,727	$ 11,780	$ 9,884
Net income	$ 859.75	$ 1,759.68	$ 950.91	$ 793.25

Profit Margin= Net Income/ Net Revenue

For 2001= 859.87/18625=0.05 or 5%

For 2000= 1759.68/15727= 0.11 or 11%

For 1999= 950.91/11780=0.80 or 8%

For 1998= 793.25/9884= 0.08 or 8%