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

 

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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 $180,000 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 eamings 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. Tax savings a. After-tax cost of interest b. Tax cost b. After-tax earnings c. Tax cost c. After-tax eamings 6. Tax cost e After-tax earnings t. Tax cost t. After-tax earnings Amount 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 $180,000 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 eamings 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. Tax savings a. After-tax cost of interest b. Tax cost b. After-tax earnings c. Tax cost c. After-tax eamings 6. Tax cost e After-tax earnings t. Tax cost t. After-tax earnings Amount