Rise Ltd., a listed company having registered office in Delhi, has proposed two financial plans. Details of the same are given below: Sources of funds Plan - 1 Plan - 2 Equity shares of ₹100 each ₹22,50,000 ₹45,00,000 12

Plan-1 has more financial risk as its DFL (Degree of Financial Leverage) is likely to be higher. Plan-1 has higher Debt to Equity ratio as compared to Plan-2. Therefore, Plan-1 is more risky than Plan-2. Debt/Equity Ratio (Plan-1): (₹10,00,000 Debentures + ₹50,00,000 Preference Shares) / ₹22,50,000 Equity Shares = ₹60,00,000 / ₹22,50,000 = 2.66 Debt/Equity Ratio (Plan-2): ₹30,00,000 Debentures / ₹45,00,000 Equity Shares = 0.66 Plan-1 relies more heavily on fixed-cost financing (debt and preference shares), which increases its financial leverage and thus its financial risk. A higher DFL means that a small change in EBIT will result in a larger change in EPS, making the earnings more volatile. The higher debt-to-equity ratio also indicates a greater reliance on borrowed funds, increasing the company's financial obligations and risk of default if earnings decline.