Increasing financial leverage can increase both the cost of debt, ( rdebt ), and the cost of equity, (r equity). How can the overall cost of capital stay constant? (Assume the firm pays no taxes.) The overall cost of capital can stay constant because in this case a higher weight is applied to the lower-cost source of capital. the weight applied to debt in the cost of capital formula decreases. the debt-to-equity ratio decreases. the company may start to use the tax shield