Question: XYZ Pharma Inc. is a pharmaceutical company that traditionally has not used debt to finance its projects. Over the last 10 years, it has also reported high returns on its projects and growth, and made substantial research and development expenses over the time period. The health care business overall is growing much slower now, and the projects that the firm is considering have lower expected returns.
a. How would you justify the firm's past policy of not using debt?
b. Do you think the policy should be changed now? Why or why not?