Question

The current academic consensus regarding the relevance of bankruptcy costs on capital structure decisions is that

1only the direct costs associated with bankruptcy need be considered since the indirect costs are minor by comparison and are difficult to quantify

2none of the above is true

3expected bankruptcy costs for large, healthy firms are small and probably can be ignored when determining these firmsʹ capital structures                                                  

4the relevance of bankruptcy costs to a firmʹs capital structure decision is directly proportional to the number of times the firm has filed for bankruptcy in the past

Answer 1

This is the most relevant statement. Whilst it is clear that the PV of all Bankruptcy Costs are taken in to consideration to assess the value of a firm basis it's capital structure, only those costs which would have otherwise not arisen except during bankruptcy have to be considered:

Hence, this statement is True

1.only the direct costs associated with bankruptcy need be considered since the indirect costs are minor by comparison and are difficult to quantify