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 $220,000 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:

1. Calculate Americans tax savings from deduction of these interest payments and their after-tax cost.
2. Calculate Braves tax cost and after-tax earnings from its receipt of interest income from American.
3. Calculate Mr. Freedoms tax cost and after-tax earnings from his receipt of interest income from American.

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