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Comprehensive Problem

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.

(CONT….)

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

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.

            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       11¼

         1999       16¾

         2000       28½

         2001       9½

a.    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.

b.    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.

7.      The book values per share for the same four years discussed in the preceding question were:

1998       $1.18

1999       $1.55

2000       $2.29

2001       $3.26

a.    Compute the ratio of price to book value for each year.

b.    Is there any dramatic shift in the ratios worthy of note?