Upjohn, also a major pharmaceutical company, is con- sidering increasing its debt ratio from 11% to 40%, which is its optimal debt ratio. Its beta is 1.17, and the current Treasury bond rate is 6.50%. The return on eq- uity was 14.5% in the most recent year, but it is dropping as health care matures as a business. The company has also been mentioned as a possible takeover target and is widely held.

a. Would you suggest that Upjohn move to the opti- mal ratio immediately? Explain.

b. How would you recommend that Upjohn increase its debt ratio?

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