H Ltd was incorporated in 20x1 with share capital of 10,000,000 ordinary shares of $1 each.

In February 20x2, H Ltd issued 1,000,000 cumulative convertible A preference shares at $10 each. The cumulative preference shares pay net dividends of 5% per year and are convertible into ordinary shares during the year 20x5 at the rate of 8 ordinary shares for 1 preference share.

In February 20x2, H Ltd also issued options to the public to buy 5,000,000 of the companys ordinary shares at an exercise price of $1.60 per share, exercisable from January 20x5.

In March 20x3, H Ltd issued 1,000,000 convertible B preference shares at $5 each. The preference shares pay net dividends (non-cumulative) of 4% per year and are convertible into ordinary shares during the year 20x6 at the rate of 5 ordinary shares for 1 preference share.

In 20x4, H Ltd paid dividends of 5% and 4% to its A and B preference shareholders, respectively. H Ltds profit after tax was $1,400,000 for the year ended 31 December 20x4. The average market price of H Ltds ordinary shares in 20x4 was $2.50 per share.

Required:

(a) Compute the basic EPS and diluted EPS for H Ltd for the year ended 31 December 20x4. Present your answers in dollars and round off your answers to four decimal places.

(b) How would your answer in part (a) change if H Ltd did not pay any dividends to its A preference shareholders and B preference shareholders during 20x4?

(c) When there are more than one dilutive potential ordinary shares (POS), why do we use the step-by-step basis and start with the most dilutive POS when computing diluted EPS?