wxs1986

If you look at the levered cost of equity as follows: r = r* + (r*- i)(D/E)(1-tx) - (This will not be on the exam) - then the WACC will tend to be quite a bit more sensitive to changes in capital than the cost of equity. Thus rendering Schweser wrong...

But this is completely besides the point. Both FCFF and FCFE can be used for firms with upcoming capital structure changes. FCFF just happens to be more convenient. (I would imagine that CFAI prefers FCFF for changing structures, i mention this incase it is on the exam)



On convenience:

If you know that a firm's capital structure is about to undergo some major changes, this should affect the value of the equity piece (hopefully in a positive manner). Evaluating equity value using FCFE alone may not take this oncoming change (unless you modify all the financial statements accordingly) into account, leading to a useless number.

Easier to use FCFF (which does not count interest payments that are about to change) to find the firm value and then subtract the value of debt. This will give you an accurate value of the equity.

Of course, you would adjust the WACC to represent the future structure and true upcoming cost of capital. So, FCFF may be preferable, but not due to the discount rate. It is simply more user friendly.