Purple Hedgehog Forestry Corporation has generated earnings of $240,000,000. Its target capital structure consists of 60% equity and 40% debt. Its plans to spend $83,000,000 on capital projects over the next year and expects to finance this investment in the same proportion as its capital structure The company makes distributions in the form of dividends. Purple Hedgehog Forestry is considering using more equity and less debt in its capital structure. Which of these statements best describes how this will affect the firm's annual dividend, assuming that all other factors are held constant?
a. Purple Hedgehog Forestry will pay a smaller annual dividend if it goes forward with this decision.
b. Purple Hedgehog Forestry's annual dividend will be greater if it goes forward with this decision.
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