American Corporation has two equal shareholders, Mr. Freedom and Brave Inc. In addition to their investments in American stock, both shareholders have made substantial loans to American. During the current year, American paid $170,000 interest each to Mr. Freedom and Brave Inc. Assume that American and Brave have 21 percent tax rates, and Mr. Freedom's marginal tax rate on ordinary income is 37percent.

1. Recalculate Brave's tax cost and after-tax earnings assuming its receipt of interest from American is treated as a constructive dividend.
2. Recalculate Mr. Freedom's tax cost and after-tax earnings assuming his receipt of interest from American is treated as a constructive dividend.