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 percentand thats significant. We believe its 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 downeven 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 .Referring to Exhibit 4 , compute the annual percentage change in net income per common share-diluted (second numerical line from the bottom) for 19981999, 19992000, and 20002001. Also in Exhibit 4 , compute net incomeet revenue (sales) for each of the four years. Begin with 1998. 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 Compute return on stockholders equity for 2000 and 2001 using data from Exhibits 4 and 5. Analyze your results in Question 4 more completely by computing Ratios 1, 2 a, 2 b, and 3 b (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 initially. 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. The average stock prices for each of the four years shown in Exhibit 4 were as follows: 1998 11 1999 16 2000 28 2001 9 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 . Why do you think the P/E changed from its 2000 level to its 2001 level? A brief review of P/E ratios can be found under the heading Price-Earnings Ratio Applied to Earnings per Share in Chapter 2 . 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 Compute the ratio of price to book value for each year. Is there any dramatic shift in the ratios worthy of note?

4 Compute return on stockholders' equity for 2000 and 2001 using data from Exhibits 4 and 5. Exhibit 4 1998 Dollars $9.862 $4.713 1.029 2.826 121 176 $8.748 SUN MICROSYSTEMS INC. Summary Consolidated Statement of Income in millions 2001 2000 1999 Dollars Dolars Dollars Net revenues $18.250 $15.721 $11.806 Costs and expenses: Cost of sales $10,041 $ 7.549 $ 5.670 Research and development 2016 1.630 1.280 Selling general and administrative 4.544 4,072 3.196 Goodwill amortization 261 In process research and development 12 Total costs and expenses $16.939 $12.328 $10.286 Operating income 1.311 2393 1520 Gain floss) on strategic investments - Interest income, net Litigation settlement income before taxes $ 1.584 $ 2.771 $ 1505 Provision for income taxes. 917 Cumulative effect of change in accounting principle, net... (54) Net Income $ 927 $ 1,854 $1,030 Not income per common share-diluted - $ 0.27 $ 0.55 $ 0.31 Shares used in the calculation of net income per common share-diluted 3.417 3.379 3.282 190) $1.162 603 575 407 $ 755 3.180 page 94 Exhibit 5 SUN MICROSYSTEMS INC. Consolidated Balance Sheets (in millions) 25 mins left in book 18% 2001 2000 Assets Current assets: Cash and cash equivalents $ 1,472 $ 1,849 Short-term investments 387 626 673 Accounts receivable, net of allowances of $410 in 2001 and $534 in 2000 2,955 2,690 Inventories........... 1,049 557 Deferred tax assets.... 1,102 Prepaids and other current assets 969482 Total current assets. ... $ 7,934 $ 6,877 Property, plant and equipment, net 2,697 2,095 Long-term investments 4,677 4,496 Goodwill, net of accumulated amortization of $349 in 2001 and $88 in 25 mins left in book 18% 2000 Other assets, net.... 2,041 163 832 521 $18,181 $14,152 Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings $ 3 $ 7 Accounts payable ....... 1,050 9 24 Accrued payroll- related liabilities 488 751 Accrued liabilities and other 1,374 1,155 Deferred revenues and customer deposits 1,827 1,289 Warranty reserve....... 314 211 Income taxes payable 90 209 Total current liabilities. $ 5,146 $ 4,546 Deferred income taxes 744 577 Long-term debt and other obligations 1,705 1,720 25 mins left in book 18% Total debt............$ 7,595 $ 6,843 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 6,238 2,728 Treasury stock, at cost: 288 shares in 2001 and 301 shares in 2000 (2,435) (1,438) 25 mins left in book 18% Deferred equity compensation Retained earnings...... (73) 6,885 (15) 5,959 Accumulated other comprehensive income (loss) (29) 75 Total stockholders' equity $10,586 $ 7,309 $18,181 $14,152 page 95 5. Analyze your results in 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 initially. 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 25 mins left in book 18%