In MM’s world, there are no bankruptcy costs whereas in real life companies face severe costs in case of bankruptcy. High legal costs related to customer, supplier and employee settlements are incurred. Furthermore, a bankrupt firm’s assets will most probably be liquidated at cheaper prices, lowering the worth of its assets. Not only bankruptcy, but the possibility of financial distress can also create problems leading to higher interest rates, contractions in credit purchases, employee jump ship and loss of customers. Therefore, financial distress or bankruptcy costs refrain firms from abundant debt financing. Especially firms with higher business risk should rely less on debt financing.