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. Date Range Annual Percentage Change 1998-1999 1999-2000 2000-2001 2. Also in Exhibit 4, compute net income/net revenue (sales) for each of the four years. Begin with 1998. Year Net Income/Net Revenue 1908 1999 2000 2001 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). Reason for Change Cost of sales Research and development Selling, general and administrative expense Provision for income tax *Compute return on stockholders' equity for 2000 and 2001 using data from Exhibits 4 and 5. Year Return on Equity 2000 2001 5. Analyze your results in Question 4 more completely by computing Ratios 1, 2a, 2b, and 3b for 2000 and 2001. Determine the main contributing factor to the change in return on stockholders' equity between 2000 and 2001. Think in terms of DuPont system of analysis. 6. The average stock prices for each of the four years shown in in Exhibit 4 were as follows: Year Average Stock Prices Price Earnings (P/E) 1998 11 % 1999 16% 2000 28% 20019% Compute the price-earnings (P/E) ration for each year in the table above. (Take the stock price shown above and divide by net income per common stock-dilution from Exhibit 4) b. Assess why the P/E changed from its 2000 level to its 2001 level. 7. The book values per share for the same four years discussed in the preceding question were: Year Book Values Ratio of price to book 1998 $1.18 value 1999 $1.55 2000 $2.29 2001 $3.26 Compute the ratio of price to book value for each year in the table above. b. Assess whether there is any dramatic shift in the ratios worthy of note. Exhib SUN MICROSYSTEMS INC. Summary Consolidated Statement of Income in millions) Net revenues 2001 Dollars Dollars Dollars $18,250 $15,721 $11,806 2000 1999 1998 Dollars $9.862 Costs and expenses Cost of sales. $10,041 $ 7,549 $ 5,670 $4,713 Research and development 2016 1,630 1,280 1,029 Selling, general and administrative 4.544 4,072 3.196 2,826 Goodwill amortization. 261 65 19 4 In-process research and development. 77 12 121 176 Total costs and expenses. $16,939 $13,328 $10,286 $8,748 Operating Income 1,311 2,393 1,520 1,114 Gain (loss) on strategic investments (90) 208 Interest income, net 363 170 85 Litigation settlement. Income before taxes $1,584 Provision for income taxes. 603 $2.771 917 $ 1,605 575 $1,162 407 Cumulative effect of change in accounting principle, net (54) Net income Net income per common share-diluted. Shares used in the calculation of net income per common share-diluted $ 927 $ 1,854 $ 0.27 $ 0.55 $1,030 $ 0.31 $ 755 $0.24 3.417 3,379 3.282 3,180 Exhibit 5 Assets Current assets: Cash and cash equivalents SUN MICKOSYSTEMS INC. Consolidated Balance Sheets (in millions) Short-term investments Accounts receivable, net of allowances of $410 in 2001 and $534 in 2000 Inventories Deferred tax assets Prepaids and other current assets Total current assets Property, plant and equipment, net Long-term investments Goodwill, net of accumulated amortization of $349 in 2001 and $88 in 2000 Other assets, net Liabilities and Stockholders' Equity Current liabilities: 2001 2000 $ 1,472 $ 1,849 387 626 2,955 2,690 1,049 557 1,102 673 969 482 $ 7.934 $ 6,877 2,697 2,095 4,677 4,496 2,041 163 832 521 $18,181 $14,152 Short-term borrowings Accounts payable Accrued payroll-related liabilities Accrued liabilities and other Deferred revenues and customer deposits Warranty reserve Income taxes payable Total current liabilities Deferred income taxes Long-term debt and other obligations Total debt Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value, 10 shares authorized (1 share 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 3,495 shares in 2000 Treasury stock, at cost: 288 shares in 2001 and 301 shares in 2000 Deferred equity compensation Retained earnings $357 1,050 924 488 751 1,374 1,155 1,827 1,289 314 211 90 209 $ 5,146 $ 4,546 744 577 1.705 $ 7,595 1.720 $ 6,843 6,238 2,728 (2,435) (1,438) (73) (15) 6,885 5,959 Retained earnings 6,885 5,959 Accumulated other comprehensive income (loss) (29) 75 Total stockholders' equity $10,586 $ 7.309 $18,181 $14,152