Insolvency and agency costs both act as limits on the amount of debt in the capital structure.

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Insolvency refers to the risk of a company being unable to fulfill its debt obligations, which limits the amount of debt it can take on. Agency costs arise due to the conflicts of interest between different stakeholders in a company, such as shareholders and managers. These costs can increase as debt levels rise, as creditors may require more monitoring and control over the company's operations. Both insolvency and agency costs, therefore, act as limits on the amount of debt that a company can include in its capital structure.

Insolvency and Agency Costs Both Act as Limits on the Amount