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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 $140,000 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. Calculate American's tax savings from deduction of these interest payments and their after-tax cost.
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