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).