d) Clarendon Plc’s issued share capital is currently 4,000,000 ordinary shares of $0.50 each. On October 1, 2012 the company issued $2,000,000 worth of 9% convertible loan stocks. Each $500 nominal worth of loan stock is convertible over the next three years as follows:

On December 31, 2012 350 shares

On December 31, 2013 320 shares

On December 31, 2014 300 shares

The following are the trading results for the years ended December 31:

2012 2013

Net Profit before interest and tax $3,200,000 $3,600,000

The applicable tax rate is 35%.

Required:

1. Calculate the basic EPS for 2012 and 2013
2. Calculate the diluted EPS for 2012 and 2013

Explain briefly to a potential investor the significance of diluted EPS