Comphrehensive Problem

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COMPREHENSIVE PROBLEM

Sun Microsystems is a leading supplier of computer related products, including servers, workstations, storage devices, and network switches.

Sun Microsystems (trends, ratios, stock performance)

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 percentÐ'--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 downÐ'--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 1. Also, for additional analysis of other factors, consolidated balance sheet(s) are presented in Exhibit 2 on page 84.

1.) Referring to Exhibit 1, compute the annual percentage change in net income per common share-diluted (2nd numerical line from the bottom) for 1998Ð'-1999, 1999Ð'-2000, and 2000Ð'-2001.

2.) Also in Exhibit 1, 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 (which follow Exhibit 1 on the next page) 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.

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.

A.) 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 1 were as follows:

1998=111/4