American Corporation has two equal shareholders, Mr$.$ Freedom and Brave, Incorporated. In addition toAmerican Corporation has two equal shareholders, Mr$.$ Freedom and Brave, Incorporated. In addition to

their investments in American stock, both shareholders have made substantial loans to American.

During the current year, American paid $$150,000$ interest each to Mr$.$ Freedom and Brave, Incorporated.

Assume that American and Brave have $21$ percent tax rates, and Mr$.$ Freedom's marginal tax rate on

ordinary income is $37$ percent.

Required:

a$.$ Calculate American's tax savings from deduction of these interest payments and their after$-$tax cost.

b$.$ Calculate Brave's tax cost and after$-$tax earnings from its receipt of interest income from American.

c$.$ Calculate Mr$.$ Freedom's tax cost and after$-$tax earnings from his receipt of interest income from

American.

e$.$ Recalculate Brave's tax cost and after$-$tax earnings assuming its receipt of interest from American is

treated as a constructive dividend.

f$.$ Recalculate Mr$.$ Freedom's tax cost and after$-$tax earnings assuming his receipt of interest from

American is treated as a constructive dividend.

Answer is complete but not entirely correct.

their investments in American stock, both shareholders have made substantial loans to American.

During the current year, American paid $$150,000$ interest each to Mr$.$ Freedom and Brave, Incorporated.

Assume that American and Brave have $21$ percent tax rates, and Mr$.$ Freedom's marginal tax rate on

ordinary income is $37$ percent.

Required:

a$.$ Calculate American's tax savings from deduction of these interest payments and their after$-$tax cost.

b$.$ Calculate Brave's tax cost and after$-$tax earnings from its receipt of interest income from American.

c$.$ Calculate Mr$.$ Freedom's tax cost and after$-$tax earnings from his receipt of interest income from

American.

e$.$ Recalculate Brave's tax cost and after$-$tax earnings assuming its receipt of interest from American is

treated as a constructive dividend.

f$.$ Recalculate Mr$.$ Freedom's tax cost and after$-$tax earnings assuming his receipt of interest from

American is treated as a constructive dividend.