American 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 $140,000 interest each to Mr. Freedom and Brave, Incorporated. Assume that American and Brave have 21 percent tax rates, and Mr. Freedoms marginal tax rate on ordinary income is 37 percent.

Required:

Slove for F:

Recalculate Mr. Freedoms tax cost and after-tax earnings assuming his receipt of interest from American is treated as a constructive dividend.

constructive dividend.

\begin{tabular}{|l|rr|} \hline & \multicolumn{2}{|c|}{ Amount } \\ \hline a. Tax savings & $ & 58,800 \\ \hline a. After-tax cost of interest & $ & 221,200 \\ \hline b. Tax cost & $ & 29,400 \\ \hline b. After-tax earnings & $ & 110,600 \\ \hline c. Tax cost & $ & 51,800 \\ \hline c. After-tax earnings & $ & 88,200 \\ \hline e. Tax cost & $ & 10,290 \\ \hline e. After-tax earnings & & 129,710 \\ \hline f. Tax cost & & \\ \hline f. After-tax earnings & \\ \hline \end{tabular}