Ultramart is a chain of large discount supermarkets with 30 locations primarily in southern Ontario. The company was founded about 40 years ago. Although the company is now publicly traded, the founding family still has 30% of the 50 million common shares outstanding, which are trading around $40 per share. The second generation of the family holds the important posts in management. 

The CEO, Theodor (Ted) Chamberlain, has bold plans to expand Ultramart beyond the Ontario border. Recently, he attended a conference on finance and strategy where there was much discussion about less conventional types of financial instruments. After the conference, he comes to you, the CFO of Ultramart, to talk about some of what he heard and saw. 

Ted: The investment bankers went over quite a few financial instruments. In keeping with the theme of the conference, they didn’t spend much time on traditional stocks and bonds. Instead, they talked a lot about options, swaps, and so on. I didn’t find much of it relevant, but one thing that did catch my eye was the idea of hybrids. They said that hybrids, or compound financial instruments, are a combination of different instruments, such as a bond that is convertible into shares. I know that hybrid cars are very popular these days, and it seems that the trend is catching on in finance as well. 

You: Yes, I have heard of hybrid instruments before. 

Ted: As you know, we are going to ramp up our expansion plans. To do that, we need to bring in a lot more financing, probably $500 million or so. I am wondering whether these hybrids are a good alternative. We could go the traditional way and issue more shares or bonds to the public. The speakers at the conference talked about convertible bonds benefiting from lower interest rates of 3–4% because of the sweeteners in the deal. If this works, we could save quite a bit of money. What do you think? Could you write me a memo explaining these hybrids and whether we should go with some sort of hybrid or more traditional financing sources? 

Required: 

Prepare the memo requested by the CEO.