Case #1 – Sun Microsystems – Questions (pp. 92-95)

Sun Microsystems (trends, ratios stock performance) (LO3) Sun Microsystems is a leading supplier of computer-related products, including servers, workstations, storage devices, and network switches.*

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 on page 94.

1. Referring to Exhibit 4, 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.
2. Also in Exhibit 4, compute net income/net revenue (sales) for each of the four years. Begin with 1998.
3. What is the major reason for the change in the answer for Question 2 between 2000 and 2001? To answer this question for each of the two years, take the ratio of the major income statement accounts to net revenues (sales).

Cost of sales

Research and development

Selling, general and administrative expense

Provision for income tax

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

Comprehensive Problem 2 (Continued)

Exhibit 4

5. Analyze your results to Question 4 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.

What do you think was the main contributing factor to the change in return on stockholders’ equity between 2000 and 2001? Think in terms of the Du Pont system of analysis.

6. The average stock prices for each of the four years shown in Exhibit 4 were as follows:

1998                11¼

1999                16¾

2000                28½

2001                9½

1. 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 4.
2. Why do you think the P/E has changed from its 2000 level to its 2001 level?

A brief review of P/E ratios can be found under the topic of Price-Earnings Ratio Applied to Earnings per Share in Chapter 2.

9. Using the following information for a U.S. state:

           Nominal GDP                    Real GDP                              Population                            Year

           (millions)                            (millions 2009 $’s)                               

                    1,151,119                          1,421,713                              32,987,911                           1998       

                    1,879,520                          1,975,457                              36,020,878                           2006

                    2,350,807                          2,143,167                              38,792,459                           2014

What is the average annual growth rate for this state during the time periods listed? (GDP per capita)

       (Note: time periods of interest are 1998-2006 & 2006-2014)

What is the average annual inflation rate for this state during the time periods listed?

To what extent are living standards likely changing in this economy? Explain and support your

       claim using evidence from the above table.

                       d.    For 1 bonus point, indicate the U.S. state associated with the above data.

The following are selected ledger accounts of Marigold Corporation at December 31, 2017: Cash $187,000 Entertainment expense $71,700 Inventory (as of Jan. 1, 2017) 540,000 Office expense 32,800 Sales revenue 4,269,000 Insurance expense 24,400 Unearned revenue 129,000 Advertising expense 51,600 Purchases 2,784,000 Freight-out 91,800 Sales discounts 36,000 Depreciation of office equipment 50,000 Purchase discounts 29,000 Depreciation of sales equipment 37,800 Salaries and wages (sales) 286,000 Telephone and Internet expense (sales) 16,500 Salaries and wages (administrative) 349,000 Utilities expense (administrative) 33,800 Purchase returns and allowances 15,000 Miscellaneous expense 8,300 Sales returns and allowances 77,000 Rental revenue 250,000 Freight-in 70,000 Loss on disposal of equipment 62,000 Accounts receivable 144,100 Interest expense 193,000 Sales commission expense 82,100 Common shares 810,000 Holland’s effective tax rate on all items is 25%. A physical inventory indicates that the ending inventory is $688,000. The number of common shares outstanding is 81,000. Prepare a condensed multi-step 2017 income statement for Marigold Corporation, showing expenses by function. Include calculation of EPS.

Prepare a condensed multi-step 2017 income statement for Marigold Corporation, showing expenses by function. Include calculation of EPS. (Round per share answer to 2 decimal places, e.g. 52.74.). please do it with an excel sheet

What is WWE's (World Wrestling Entertainment​) global economic impact vs. its U.S. economic impact?

It is often said that the demand of radio and audio entertainment as a whole is on a steep decline. Do you agree with this statement?                                                                                                            

1. A perfectly competitive industry faces a demand curve given by Q^D= 2515 – 2P. The long-run total cost curve of each firm is given by LTC = 10q -.2q²+.004q³. Derive the long-run equilibrium values of output per firm, market output, price, and the number of firms.
2. You are told that in long-run perfectly competitive equilibrium each firm produces 25 units and that the marginal cost at that level of output is $10. Solve for the long-run equilibrium values of market output, price, and the number of firms. The market demand is given by Q^D= 4000 – 10P.
3. Assume the world market for calcium is perfectly competitive and that all existing producers and potential entrants are identical. Consider the following information about the price of calcium. Between 1990 and 1995, the market price was stable at $2/pound. In the first three months of 1996, the market price doubled reaching $4/pound, where it stayed for the remainder of 1996. Throughout 1997 and 1998, the price declined, eventually reaching $2/pound by the end of 1998. Between 1998 and 2002, the price remained stable at $2/pound. Assume that technology has not changed and that input prices have remained constant over the period. Using words, explain this pricing pattern over the period.

Koala Entertainment Limited (KEL) is a leading entertainment, artists and performance brokerage agency （演出經紀機構） in Australia. KEL founder Mr Wright realised that China is a world-class media and entertainment platform and wants to begin penetrating the firm’s popular musical, magic shows there, but KEL has little international experience. Mr Wright is unaware of the various types of investment and nontariff trade barriers that KEL might face in China.

Q. What can KEL management do to minimise the threat of government intervention? Explain the FOUR strategies with an example based on the above case. (~300 words)

Below are six strategies and only four is needed.

• Research to gather knowledge and intelligence. Understand trade and investment barriers abroad. Scan the business environment to identify the nature of government intervention.

• Choose the most appropriate entry strategies. Most firms choose exporting as their initial strategy, but if high tariffs are present, other strategies should be considered, such as licensing, or FDI and JVs that allow the firm to produce directly in the market.


• Take advantage of foreign trade zones. FTZs are areas where imports receive preferential tariff treatment, intended to stimulate local economic development. e.g., A successful experiment with FTZs has been the maquiladoras — export-assembly plants in northern Mexico.

• Seek favourable customs classifications for exported products. Reduce exposure to trade barriers by ensuring that products are classified properly.


• Take advantage of investment incentives and other government support programs.

• Lobby for freer trade and investment. Increasingly, nations are liberalizing markets in order to create jobs and increase tax revenues.

How does the WWE (World Wrestling Entertainment) Differentiation Strategy? to stay successful and at the same time continue to grow?

Management of AG Travel and Tour has identified two groups of individuals that
would be interested in the vacation package consisting of room and board and/or
entertainment. The maximum amount that group 1 is willing to pay for room and
board is GHC 2500 and for entertainment is GHC 500. For group 2, the maximum
amount they are willing to pay for room and board is GHC 1800 and for
entertainment is GHC 750. Although AG Travel and Tour is not able to identify
members of either group, it does know that each group values the components of
the package differently. Assuming there are an equal number of members in each
group and that the total membership in each group is a single individual. If the
marginal cost of providing the service (room and board and/or entertainment) to
each group is GHC 1000.
i. How much will the hotel charge members of each group for the vacation
package if it could identify the members in each group?
ii. How much will the profit for AG Travel and Tour be?
iii. Since AG Travel and Tour is not able to identify members of each group,
what price should it charge for each product?
iv. What will be the profit for AG Travel and Tour in the case of (iii) above?

v. If AG Travel and Tour wants to charge a package price, what is the highest
price it can charge?
vi. What profit will AG Travel and Tour make if it charges the package price
found in (v) above?