What is used to account for changes in working capital when calculating levered free cash flow (FCFE)?

When calculating levered free cash flow to equity (FCFE), accounting for changes in working capital is crucial. Working capital reflects a company's operational efficiency and short-term financial health, and its changes can significantly impact cash flow.

Adjusting net income for changes in working capital involves analyzing variations in accounts receivable, inventory, and accounts payable. Specifically, increases in accounts receivable or inventory imply cash is tied up and not available to equity holders, while increases in accounts payable can temporarily boost cash flow since it indicates that expenses have not yet been paid.

By focusing on adjustments to net income, you ensure that the cash flow figure accurately represents the cash available to equity holders after accounting for these operational changes. This approach provides a clearer picture of the company's liquidity and financial flexibility, which is essential for equity valuation.

The other options do not encompass the full scope needed to measure the impact of working capital changes on cash flow in a comprehensive manner. Therefore, the emphasis on net income adjustments is what makes it the correct approach in this context.