Question

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

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

none of the above is true

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

the 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

Answer :- Option D). The 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.

Explanation :- The last statement (Option D) mentioned in the above given question is correct answer.

i). Indirect costs of bankruptcy are not minor, They are larger / more than direct costs, accordingly, first answer choice (Option A) is incorrect.

ii). The fourth statement (Option D) is true / correct concerning the situation mentioned in the given question, accordingly, second answer choice (Option B i.e., none of above true) is incorrect answer choice.

iii). Bankruptcy costs of large firms also needed to be consider in determination of optimal capital structures for the firm in the long-run, accordingly, third answer choice (Option C) is incorrect.