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Net Borrowing has a direct impact on Free Cash Flow to Equity (FCFE) because it represents the amount of money a company raises or pays off in debt during a given period. FCFE is defined as cash flows from operating activities minus capital expenditures and debt repayments, plus new borrowings.

When a company nets increases in borrowings, it typically increases the cash available to equity holders, thereby enhancing FCFE. This is because new borrowings provide additional cash that can be used for various purposes, including financing growth opportunities or paying dividends to shareholders. Essentially, when a company takes on more debt, it can increase its cash reserves, which in turn elevates the liquidity and cash flows available for equity investors.

Therefore, since net borrowing increases the amount of cash available to equity holders, stating that it increases FCFE captures the relationship effectively. This understanding helps to clarify how capital structure decisions can influence shareholder value.