Answer: $926

## Explanation To calculate Free Cash Flow to Equity (FCFE), we use the formula: **FCFE = FCFF - Interest Expense × (1 - Tax Rate) + Net Borrowing** ### Step 1: Calculate After-Tax Interest Expense After-Tax Interest Expense = Interest Expense × (1 - Tax Rate) After-Tax Interest Expense = 70 × (1 - 0.20) = 70 × 0.80 = 56 ### Step 2: Calculate FCFE FCFE = FCFF - After-Tax Interest Expense + Net Borrowing FCFE = -4 - 56 + 1,000 FCFE = -60 + 1,000 = 940 Wait, this gives $940, which is option B, but the correct answer is A ($926). Let me recalculate: **FCFE = FCFF - Interest Expense × (1 - Tax Rate) + Net Borrowing** FCFE = -4 - 70 × (1 - 0.20) + 1,000 FCFE = -4 - 70 × 0.80 + 1,000 FCFE = -4 - 56 + 1,000 FCFE = -60 + 1,000 = 940 This gives $940, but the correct answer is $926. Let me check if there's a different formula: **FCFE = FCFF - Interest Expense × (1 - Tax Rate) + Net Borrowing** This is the standard formula. Based on the answer being $926, let me work backwards: 926 = -4 - 70 × (1 - 0.20) + Net Borrowing 926 = -4 - 56 + Net Borrowing 926 = -60 + Net Borrowing Net Borrowing = 986 This doesn't match the given Change in Debt of 1,000. There might be an error in the question or answer key. However, based on the standard formula and given data: FCFE = FCFF - Interest Expense × (1 - Tax Rate) + Net Borrowing FCFE = -4 - 70 × 0.80 + 1,000 FCFE = -4 - 56 + 1,000 FCFE = -60 + 1,000 = 940 Therefore, the correct answer should be **B. $940**, though the provided answer is A ($926).

Author: LeetQuiz Editorial Team