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 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 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.

Exhibit 1

2001 Dollars

2000 Dollars

1999 Dollars

1998 Dollars

Net revenues

$18,725

$15,717

$11,777

$9,815

Costs and expenses:

Cost of sales

$ 10,041

$ 7,546

$ 5,665

$ 4,731

Research anddevelopment

2,014

1,629

1,265

1,022

Selling, general and administrative

4,546

4,067

3,203

2,801

Goodwill amortization

263

64

16

0.1

In-process research and development

78

9

116

177

Total costs and expenses

$ 16,942

$ 13,315

$ 10,265

$ 8,731.1

Operating Income

$ 1,783

$ 2,402

$ 1,512

$ 1,083.9

Gain (loss) on strategic investments

$ -95

$ 214

-

-

Interest income, net

$ 361

$ 168

$ 88

$ 49

Litigation settlement

-

-

-

-

Income before taxes

$ 2,049

$ 2,784

$ 1,600

$ 1,132.9

Provision for income taxes

$ 1,111.78

$ 854.55

$ 483.1

$ 370.9

Cumulative effect of change in accounting principle, net

$ -54

-

-

-

Net income

$ 991.22

$ 1,929.45

$ 1,116.9

$ 762

Net income per common share-diluted

$ 0.29

$ 0.57

$ 0.34

$ 0.24

Shares used in the calculation of net income per common share-diluted

3,418

3,385

3,285

3,175

Exhibit 2

Assets

2001

2000

Current assets:

Cash and cash equivalents

$ 1,475

$ 1,849

Short-term investments

386

626

Accounts receivable, net allowances of $410 in 2001 and $534 in 2000

2,957

2,700

Inventories

1,048

554

Deferred tax assets

1,084

678

Prepaids and other current assets

971

476

Total current assets

7,921

6,883

Property, plant and equipment, net

2,696

2,093

Long-term investments

4,674

4,484

Goodwill, net of accumulated amortization of $349 in 2001 and $88 in 2000

2,040

166

Other assets, net

830

521

18,161

14,147

Liabilities and Stockholders' Equity

Current liabilities:

Short-term borrowings

3

5

Accounts payable

1,053

928

Accrued payroll-related liabilities

490

750

Accrued liabilities and other

1,379

1,157

Deferred revenues and customer deposits

1,821

1,286

Warranty reserve

310

209

Income taxes payable

92

216

Total current liabilities

5,148

4,551

Deferred income taxes

746

573

Long-term debt and other obligations

1,701

1,717

Total debt

7,595

6,841

Commitments and contingencies

Stockholders' equity:

Preferred stock, $0.001 par value, 10 shares authorized (1 sahre 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 301 shares in 2000

6,239

2,732

Treasury stock, at cost: 288 shares in 2001 and 301 shares in 2000

-2,434

-1,441

Deferred equity compensation

-73

-15

Retained earnings

6,862

5,958

Accumulated other comprehensive income (loss)

-28

72

Total stockholders' equity

10,566

7,306

18,161

14,147

Part A

Referring to Exhibit 1, 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.

Rate of change, 1998 to 1999:

Rate of change, 1999 to 2000:

Rate of change, 2000 to 2001:

Part B

Also in Exhibit 1, compute net income/net revenue (sales) for each of the four years. Begin with 1998.

1998 Profit Margin:

1999 Profit Margin:

2000 Profit Margin:

2001 Profit Margin:

Part C

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

2000 Return on Stockholders' Equity:

2001 Return on Stockholders' Equity:

Part D

Analyze your results to Question 2 (Part B above) more completely by computing ratios 1, 2a, 2b, and 3b (these numbers correspond with the numbered ratios listing in Chapter 3 of our textbook) for 2000 and 2001. Actually, the answer to ratio 1 can be found as part of the answer to question 2 (Part B), but it is helpful to look at it again.

Ratio

2000

2001

1

2a

2b

Part E

The average stock prices for each of the four years shown in Exhibit 1 were as follows:

199811

199916

200028

20019

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.

1998 P/E Ratio:

1999 P/E Ratio:

2000 P/E Ratio:

2001 P/E Ratio: