Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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 $180,000 interest each to Mr. Freedom and Brave Inc. Assume that American and Brave have 21 percent tax rates, and Mr. Freedoms marginal tax rate on ordinary income is 37 percent.
- Calculate Americans tax savings from deduction of these interest payments and their after-tax cost.
- Calculate Braves tax cost and after-tax earnings from its receipt of interest income from American.
- Calculate Mr. Freedoms tax cost and after-tax earnings from his receipt of interest income from American.
- Recalculate Braves tax cost and after-tax earnings assuming its receipt of interest from American is treated as a constructive dividend.
- Recalculate Mr. Freedoms tax cost and after-tax earnings assuming his receipt of interest from American is treated as a constructive dividend.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started