Final Assignments Corporation Finance Analysis Some Of Specific Types Of Financial Risk In Case Of Bridgestone.pdf

VIETNAM NATIONAL UNIVERSITY, HANOI INTERNATIONAL SCHOOL

FINAL ASSIGNMENTS

CORPORATION FINANCE ANALYSIS SOME OF SPECIFIC TYPES OF FINANCIAL RISK

Work breakdown structure:

No | Name Student ID | Task Contribution

level (%)

2.2.1 Foreign exchange risk

3 Conclusion

2.1.2 Interest rate risk

2.1.3 Commodity price risk

2.1.4 Credit risk 3 Conclusion

Table of Contents

2.1 Analysis some 0ƒ specffc types 0ƒ ftinanciadl risk im case 0ƒ Bridgestone: 1

1 Overview about Bridgesfone:

Bridgestone is a tire and rubber products company that develops, manufactures, and markets

tires and tire tubes, tire raw materials, wheels and accessories, and other tire-related products

for passenger cars, construction and mining vehicles, agricultural machinery, trucks, buses,

industrial, etc

The vision statement for Bridgestone is its strategic plan for the future — it defines what and where Bridgestone Company wants to be in the future The vision statement for Bridgestone is a document identifying the goals of Bridgestone to facilitate its strategic, managerial, as well as general decision making processes

The Bridgestone Group's mission is based on the words of its founder: “Serving Society with Superior Quality.” To fulfill this mission, Bridgestone Group has used the concept of “foundation” to demonstrate the sustained commitment of employees to provide its customers with world class products and services and to serve the communities where Bridgestone does business “The Bridgestone Essence” is composed of the above words, integrated corporate culture, and diversity that today’s company has inherited and a shared sense of values that can be embraced by Bridgestone employees around the world

The Bridgestone Group has about 130 manufacturing plants and R&D facilities and sells products in more than 150 countries worldwide such as: Japan, Tokyo, America, Hungary,etc

2 Introduction about Financial risk

Risk is the probable variability of returns

Financial risk refers to a company's ability to manage its debt and financial leverage, while business risk refers to the company’s ability to generate sufficient revenue to cover its operational expenses

There are three main sources of financial risk:

e Financial risks arising from an organization’s exposure to changes in market prices, such as interest rates, exchange rates, and commodity prices

as vendors, customers, and counterparties in derivatives transactions

e Financial risks resulting from internal actions or failures of the organization, particularly people, processes, and systems

2.1 Analysis some of specific types of financial risk in case of Bridgestone:

Bridgestone is a multinational company with extensive import and export activities worldwide

Therefore, changes in exchange rates affect the values recorded for revenue, expenses, assets,

and liabilities in all countries outside Japan when translated into Yen

Table 2-1: Foreign exchange risk and EBIT of Bridgestone, 2017-2021

Source: Bridgestone’s annual financial report

Table 2-2: Percentage of Foreign exchange risk versus EBIT of Bridgestone

Graph 2-1: The foreign exchange rate of USD/JYP

150.0000

145.0000 140.0000 135.0000 130.0000

125.0000 120.0000

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EBIT A part of, because JPY depreciates versus USD, Bridgestone has about 7 subsidiaries in U.S.A, when they convert the consolidated financial statements will create a loss amount In 2021, it will inverse due to JPY appreciates against USD

However, the currency exchange risk can be mitigated due to Bridgestone has subsidiaries in diversification countries Appreciation of one country to yen can offset for the depreciation of another currency

2.1.2 Interest rate risk

Interest rate risk is the probability of an adverse impact on profitability or asset value as a result of interest rate changes

Interest rate risk arises from several sources, including:

e Changes in the level of interest rates (absolute interest rate risk)

e Changes in the shape of the yield curve (yield curve risk)

e Mismatches between exposure and the risk management strategies undertaken (basis risk) Interest rate risk affects directly to borrowings and bonds with floating interest rate are exposed to interest fluctuation risk

From this definition, we will consider about impacts of interest rate risk on Bridgestone

e Short-term debts (banks loans and commercial paper)

Graph 2-2: Short-term banks loans with fluctuation interest rate

Short-term banks loans with fluctuation interest rate

90.000 6.00% 80.000

, 70,000

xŠ 60.000 400% |= = s0 00 =

= 50,000 3.00% w; 40.000 s

Year

lm Short term bank loans ———— Average interest rate

Source: Bridgestone’s annual report financial

e Long-term debt (bonds)

Table 2-3: Long-term debt at December 31,2016 and 2015

Source: Bridgestone’s annual financial report

Table 2-4: Long-term debt at December 31, 2017 and 2016

2017 2016 2017

Milions of yen Thousands of U.S doliars Borrowings from banks, insurance companies and others, weighted average interest rate

of 3.0% at December 31, 2017, and 1.9% at December 31, 2016, denominated mainly

in Japanese yen, U.S dollars and Euros:

Secured ¥ _ Y 75 § _ Unsecured 94,017 189,976 832,009 0.3% yen unsecured straight bonds, due 2018 20,000 20.000 176,991 0.2% yen unsecured straight bonds due 2019 70,000 70,000 619,469 0.1% yen unsecured straight bonds, due 2022 40,000 Ea 353,982 0.2% yen unsecured straight bonds, due 2024 50,000 ~ 442,478

0.3% yen unsecured straight bonds, due 2027 60,000 = 530,973

Obligations under finance leases 42,694 7,633 377,823 Total 376,711 287,684 3,333,725

Less current portion (76,406) (120,610) (676,159)

Long-term Debt, Less Current Portion ¥300,305 ¥ 167,074 $2,657,566

Source: Bridgestone’s annual financial report

Table 2-5: Long-term debt at December 31, 2018 and 2017

2018 2017 2018 Millions of yen Thousands of U.S doliars Borrowings from banks, insurance companies and others, weighted average interest rate

of 3.0% at December 31, 2018, and 3.0% at December 31, 2017, denominated mainly in Japanese yen, U.S Goliars and Euros:

Unsecured ¥ 62,285 ¥ 94,017 $ 561,126 0.3% yen unsecured straight bonds, due 2018 - 20,000 - 0.2% yen unsecured straight bonds, due 2019 70,000 70,000 630,631 0.1% yen unsecured straight bonds, due 2022 40,000 40,000 360,360 0.2% yen unsecured straight bonds, due 2024 50,000 50,000 450,450 0.3% yen unsecured straight bonds, due 2027 60,000 60,000 540,541 Obligations under finance leases 28,870 42,694 260,090

Total 311,155 376,711 2,803,198 Less current portion (95.931) (76.406) (864.243)

Long-term Debt, Less Current Portion ¥215,224 ¥300,305 $1,938,955

Source: Bridgestone’s annual financial report

Table 2-6: Long-term debt at December 31, 2019 and 2018

[ 2019 2018 2019 Borrowings from banks, insurance companies and others, weighted average interest rate

of 3.0% at December 31, 2019, and 3.0% at December 31, 2018, denominated mainly in Japanese yen, U.S dollars and Euros:

Unsecured ¥ 37,938 ¥ 62,285 $ 346,276 0.2% yen unsecured straight bonds, due 2019 ~ 70,000 - 0.1% yen unsecured straight bonds, due 2022 40,000 40,000 365,097 0.2% yen unsecured straight bonds, due 2024 50,000 50,000 456,371

0.3% yen unsecured straight bonds, due 2027 60,000 60,000 547,645 0.1% yen unsecured straight bonds, due 2024 50.000 _ 456.371

0.2% yen unsecured straight bonds, due 2026 50,000 - 456,371

0.4% yen unsecured straight bonds, due 2029 100,000 — 912,742 Obligations under finance leases 77.769 28.870 709.830

Total 465,707 311,155 4,250,703

Less current portion (15,783) (95,931) (144,058)

Long-term Debt, Less Current Portion ¥449,924 Y215.224 $4,106,645

Source: Bridgestone’s annual financial report

In general, short-term debt is not affected too much by volatility of interest rate compared to long-term debt The longer bond’s maturity, the riskier that bond’s value could be impacted by changing interest rates Bridgestone has long-term bonds come with a term to maturity of 10 years (in 2019, bond with maturity of 10 years about 100,000 yen) These bonds are more affected by interest rates than other bond with shorter maturity In recent years, Bridgestone has tended to use more long-term bond with 5-10 years than before

2.1.3 Commodity price risk

Commodity risk is the risk that a business’s financial performance or position will be adversely affected by fluctuations in the prices of commodities

Three main types of commodity risk to which an organization may be exposed:

e Price risk: refer that the price of output productions is not enough cover to the cost of input materials

® Quantity risk

The company uses a large quantity of natural rubber in tires and other products The availability of natural rubber suppliers in quantities sufficient for manufacturing purpose

is subject to disruption due to natural disaster, wars, terrorist actions, etc

Any disruption of activity to those operating or suppliers and any other events that impede the company plants that use those raw materials could adversely affect the Companies’ operating results and financial

= Decrease the quantity of supplied raw materials Cost risk

Increase in the costs of raw materials due to tight supply Three groups that will be exposed to commodity risk:

e Producers: can include farmers, other agricultural producers and miners They can be exposed to all of the types of risks noted above

e Buyers: can include cooperatives, commercial traders and manufactures who consume commodities in their production processes Such organizations can be exposed to commodity risk through the time lag between order and receipt of goods

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e Exporters: face risk from the time lag between order and receipt from sales, as well as political risk where compliance, regulation or availability can adversely impact sales price In this case of Bridgestone, we analyze commodity risk from 2017 to 2012 when considering Bridgestone as a buyer and supplier For commodity risk, we have considered and analyzed about percentage of Cost of goods sold to Sales in general, and in detail is volatility of price of rubber-commodity input and price of tires-commodity output to assessment

Graph 2-3: Percentage of Cost of goods sold to Sales (%)

Source: Calculated by member of Group

Percentage of cost of goods sold to sales constantly at 62%, and increase strongly in year 2020 (approximately 64%) and decrease to 62.2% in 2021 These things are completely reasonable because of rubber price as chart as following:

Graph 2-4: Rubber monthly price-Yen per kilogram

§ - i, |

& 181.01]; 4 ` # oe (

151.25 v \ “đ x3 136.37

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sharply to 257.5 yen per one kilogram This is the reason why the cost of goods sold of Bridgestone increase sharply for accounting period of 2020

= In general, expenses for main input material (rubbers) increase sharply in 2020-2021

Graph 2-5: Average tires price from 2018 to 2021

$250 + $200 +

$150 +

$100 + at) or)

$132 $133 $90 +

for Truck-Tire cost)

= Those things are considered as one commodity risk for Bridgestone because the cost for input-rubber increase at a faster rate than price for output-tires

0 — — = = =

2017 2018 2019 2020 2021 Year

Graph 2-7: Bad Debts to Total account receivable (%)

Bad Debts/Total account receivable (%)

6 5.428205513 4,90480708

2.1.5.1 Funding or cash flow liquidity risk

Funding liquidity risk refers to the risk that a company will not be able to meet its short-term financial obligations when due A classic indicator of funding liquidity risk is the current ratio

(current assets/current liabilities) or, for that matter, the quick ratio A line of credit would be

a classic militant

e Current ratio = Current asset/ Current liabilities

Graph 2-8: Current ratio of Bridgestone versus competitors

Current ratio of Bridgestone versus competitors

+50 218 221 2.23 2.24 1.97

2.00 175

1.58 5 1.41 1.36

150 11 124 1,32

1.12 1.10 1.11 100

0.50 0.00

2017 2018 2019 2020 2021

NPridgestone WYokohamaRubber & Goodyear Tire & Rubber

Source: Calculated by member of Group

® Quick ratio = (Current asset - Inventories)/ Current liabilities

Graph 2-9: Quick ratio of Bridgestone versus competitors

1.00 082 0.86

0.80 0.66 0.64 0.58 0.68 O57 0.60

Source: Calculated by member of Group

The higher the current ratio, the more capable a company is of paying its obligations because it has a larger proportion of short-term asset value relative to the value of its short-term liabilities The major competitors of Bridgestone are Yokohama Tire Corporation, Cooper

Tires, Michelin, Hankook, Pirelli, Continental Tyres, Goodyear Current ratio and quick ratio

of Bridgestone are higher than other competitors, liquidity risk of them is low

The Group is exposed to liquidity risk which is the risk of being unable to make payments on due dates because of a deterioration of the funding environment Notes and accounts payable, which are trade payable, are largely due within one year

Table 2-7: Balances of financial liabilities (including derivative financial instruments) by

due date as of the end of 2020

Non-derivative financial liabilities

Trade and other payables ¥ 420,140 ¥ 420,140 ¥420,140 ¥ _ ¥ _ Y - Y _ Y -

Bonds and borrowings 706,037 706,595 293,978 81,618 15,425 100,380 5,063 210,131 Lease liabilities 300,153 339,789 61,004 52,825 41,898 32,476 25,334 126,252 Subtotal 1,426,330 1,466,524 775,122 134,443 57,323 132,856 30,397 336,383 Derivative financial liabilities (Note)

Forward exchange contracts 3,635 3,635 3,635 ~ _ - ~ -

Currency swap contracts 4,715 4,715 1,522 (144) 442 2,895 ~ - Commodity swap contracts (351) (351) (351) _ _ _ _ _ Subtotal 7,999 7,999 4,806 (144) 442 2,895 = = Total ¥1,434,329 ¥1,474,523 ¥779,928 ¥134,299 ¥57,765 ¥135,751 ¥30,397 ¥336,383

(Note) Receivables and payables incurred by derivative transactions are presented in net amount

Source: Bridgestone’s annual financial report e Line of Credit (LOC)

Based on a cash flow plan that incorporates estimated cash inflows and outflows arising from business activities, the Group mitigates liquidity risk by understanding its future cash position in advance and managing cash position efficiently while diversifying funding options, which

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