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

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Bankruptcy occurs when a company is unable to pay its debts and can lead to financial distress, liquidation, or restructuring. This can be seen as a limit on the amount of debt a company can take on because excessive debt increases the likelihood of bankruptcy. Similarly, agency costs arise due to conflicts of interest between shareholders and management, and can increase when a company takes on too much debt. As such, both bankruptcy and agency costs limit the amount of debt a company can include in its capital structure.

Bankruptcy and Agency Costs Both Act as Limits on the Amount