Stun & Stlob Inc. (S&S) manufactures industrial fasteners. The management team maintains a stable dividend using the Lintner model:

D_{t + 1} = D_t + EPS Target payout ,

where

D_t (D_{t + 1}) = dividend in the current period t (the next period, t + 1)

EPS_t = earnings per share in period t

EPS = EPS_{t + 1} EPS_t = change in EPS

Target payout = target payout ratio = 60%

= adjustment factor = 0.005

Last quarter, the dividend was $0.365 per share on earnings (per share) of $0.60. S&Ss major competitor just declared bankruptcy and so S&S management is forecasting that earnings in the upcoming quarter will double to $1.20 per share. What percentage change in dividend should analysts predict?

1. 0.5%

2. 5%

3. 25%

4. 60%

5. 100%