Question

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 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.

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 $ 18,375 $ 15,718 $ 11,845 $ 9,878

Costs and expenses:

Cost of sales

$ 10,044

$ 7,547

$ 5,661

$ 3,865

Research and development

2,018

1,625

1,281

1,029

Selling, general and administrative

4,542

4,073

3,198

2,811

Goodwill amortization

260

64

19

0.6

In-process research and development

81 12 120 174

Total costs and expenses $ 16,945 $ 13,321 $ 10,279 $ 7,879.6

Operating Income $ 1,430 $ 2,397 $ 1,566 $ 1,998.4

Gain (loss) on strategic investments $ -90 $ 207 - -

Interest income, net $ 361 $ 166 $ 84 $ 46

Litigation settlement - - - -

Income before taxes $ 1,701 $ 2,770 $ 1,650 $ 2,044.4

Provision for income taxes $ 794.36 $ 906.05 $ 635.37 $ 1,247.9

Cumulative effect of change in accounting principle, net $ -56 - - -

Net income $ 962.64 $ 1,863.95 $ 1,014.63 $ 796.5

Net income per common share-diluted $ 0.28 $ 0.55 $ 0.31 $ 0.25

Shares used in the calculation of net income per common share-diluted 3,438 3,389 3,273 3,186

Exhibit 2

Assets 2001 2000

Current assets:

Cash and cash equivalents $ 1,474 $ 1,842

Short-term investments 390 623

Accounts receivable, net allowances of $410 in 2001 and $534 in 2000 2,955 2,682

Inventories 1,049 552

Deferred tax assets 1,000 674

Prepaids and other current assets 971 475

Total current assets 7,839 6,848

Property, plant and equipment, net 2,695 2,096

Long-term investments 4,671 4,492

Goodwill, net of accumulated amortization of $349 in 2001 and $88 in 2000 2,036 161

Other assets, net 831 516

18,072 14,113

Liabilities and Stockholders' Equity

Current liabilities:

Short-term borrowings 4 7

Accounts payable 1,045 923

Accrued payroll-related liabilities 491 753

Accrued liabilities and other 1,379 1,154

Deferred revenues and customer deposits 1,822 1,291

Warranty reserve 314 214

Income taxes payable 91 219

Total current liabilities 5,146 4,561

Deferred income taxes 743 582

Long-term debt and other obligations 1,705 1,723

Total debt 7,594 6,866

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 6,241 2,731

Treasury stock, at cost: 288 shares in 2001 and 301 shares in 2000 -2,434 -1,439

Deferred equity compensation -70 -13

Retained earnings 6,769 5,891

Accumulated other comprehensive income (loss) -28 77

Total stockholders' equity 10,478 7,247

18,072 14,113

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:

Answer 1

Return on Stockholders Equity = Net Income / Stockholders Equity

Therefore, Return on Stockholders Equity for 2000 = $1,863.95 / $7,247 = 0.2572

Return on Stockholders Equity for 2001 = $962.64 / $10,478 = 0.0919

Hence, Return on Stockholders Equity for year 2000 is 0.2572 and Stockholders Equity for the year 2001 is 0.0919.