Upjohn, also a major pharmaceutical company, is considering increasing its debt ratio from 15% to 30%, which is its optimal debt ratio. Its beta is 1.50, and the current Treasury bond rate is 6.50%. ERP is 5.5%. The return on equity was 10.5% in the most recent year, and it is dropping as health care matures as a business. The company has instituted restrictive anti-takeover measures.

a. Would you suggest that Upjohn move to the optimal ratio immediately or gradually? Explain.

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