"CP 3-2. SolutionSun Microsystems, Inc.1. Percentage change in net income per common share-diluted1999 $ .31 2000 $ .55 2001 $ .271998 $ .24 1999 $ .31 2000 $ .55 $ .07$ .24 $ ?+29.2%+77.4%–50.9%2. Profit margin 1998 1999 2000 2001Net income $755 $1,030 $1,854 $927= Net revenues 9,862 11,806 15,721 18,2507.66% 8.72% 11.79% 5.08%3. Percent of net revenue 2000 2001 Net revenues $15,721$18,250Cost of sales 7,549 48.02% 10,041 55.02%Research and development 1,630 10.37 2,016 11.05 S, G, and A 4,072 25.90 4,544 24.90 Provision forincome taxes 917 5.83 603 3.30The main problem between 2000 and 2001 was the increase in costof sales as a percentage of net revenue (48.02% to 55.02%).S3-70CP 3-2. (Continued)4. Return on stockholders ? equity2000 2001$1,854 $ 927Net income Stockholders' equity7,309 10,58625.37% 8.76%5. 2000 2001Net income 1.11.79% 5.08%Net revenues (sales) Net income Total assets 2.a.13.1% 5.10%Net income Sales 2.b. ×11.79% ×1.115.08% ×1.00Sales Total assets 13.09% 5.08%Return on assets 13.09% 5.08% 3.b. 1 - Debt/Assets) 1 -.484 1 -.418 ( ) ( ) ( )25.37% 8.73%The main contributing factor to the decline in the return onstockholders ? equity (25.37 profit margin (11.79% vs. 5.08%). The decrease in asset turnover(1.11 to 1.00) made a small contribution to the decline as did thedecline in the debt ratio (48.4% to 41.8%).S3-71 CP 3-2. (Continued)6.a. P/E = Stock price/net income per common share-diluted (EPS) 1998 1999 2000 2001Shares prices $11.25 $16.75 $28.50 $9.50EPS .24 .31 .55 .27P/E 46.9 54.0 51.8 35.2b. The sharp decline in performance caused investors to pay a lowermultiple for the stock.7.a. Price to book value = Stock price/book value 1998 1999 2000 2001Shares prices $11.25 $16.75 $28.50 $9.50Book value 1.18 1.55 2.29 3.26P/BV 9.53 10.81 12.45 2.91b. Once again, the sharp fall off in price to book value between 2000and 2001 can be attributed to the decline in performance (and theimpact on the stock prices). Book value was going up, but the ratiodeclined sharply due to the declining stock prices.S3-72 Chapter 4Discussion Questions 4-1. What are the basic benefits and purposes of developing pro forma statements anda cash budget?The pro-forma financial statements and cash budget enable the firm to determineits future level of asset needs and the associated financing that will be required.Furthermore, one can track actual events against the projections. Bankers andother lenders also use these financial statements as a guide in credit decisions. 4-2. Explain how the collections and purchases schedules are related to the borrowingneeds of the corporation.The collections and purchase schedules measure the speed at which receivablesare collected and purchases are paid. To the extent collections do not coverpurchasing costs and other financial requirements, the firm must look toborrowing to cover the deficit. 4-3. With inflation, what are the implications of using LIFO and FIFO inventorymethods? How do they affect the cost of goods sold?LIFO inventory valuation assumes the latest purchased inventory becomes partof the cost of goods sold, while the FIFO method assigns inventory items thatwere purchased first to the cost of goods sold. In an inflationary environment, theLIFO method will result in a higher cost of goods sold figure and one that moreaccurately matches the sales dollars recorded at current dollars. 4-4. Explain the relationship between inventory turnover and purchasing needs.The more rapid the turnover of inventory, the greater the need for purchase andreplacement. Rapidly turning inventory makes for somewhat greater ease inforeseeing future requirements and reduces the cost of carrying inventory. 4-5. Rapid corporate growth in sales and profits can cause financing problems.Elaborate on this statement.Rapid growth in sales and profits is often associated with rapid growth in assetcommitment. A $100,000 increase in sales may cause a $50,000 increase inassets, with perhaps only $10,000 of the new financing coming from profits. It isvery seldom that incremental profits from sales expansion can meet newfinancing needs. S4-1 4-6. Discuss the advantage and disadvantage of level production schedules in firmswith cyclical sales.Level production in a cyclical industry has the advantage of allowing for themaintenance of a stable work force and reducing inefficiencies caused byshutting down production during slow periods and accelerating work duringcrash production periods. A major drawback is that a large stock of inventorymay be accumulated during the slow sales period. This inventory may beexpensive to finance, with an associated danger of obsolescence. 4-7. What conditions would help make a percent-of-sales forecast almost as accurateas pro forma financial statements and cash budgets?The percent-of-sales forecast is only as good as the functional relationship ofassets and liabilities to sales. To the extent that past relationships accuratelydepict the future, the percent-of-sales method will give values that reasonablyrepresent the values derived through the pro-forma statements and the cashbudget.S4-2 "