If a company issues $100 in debt, how does it affect its P/E ratio, assuming the debt raised is just cash?

When a company issues $100 in debt, it raises cash that can be used for various purposes such as financing operations, investing in growth opportunities, or paying existing obligations. An essential point to understand is how this action affects the earnings and share price, which are the two primary components of the Price to Earnings (P/E) ratio.

The P/E ratio is calculated by dividing the market price per share by the earnings per share (EPS). If the company issues debt and simply holds the cash, there is no immediate effect on earnings, as the cash inflow from the debt corresponds to a liability on the balance sheet without generating immediate earnings. Thus, neither the price per share nor the earnings per share changes in the short term because the cash impact occurs without affecting operational profits or losses.

As a result, since the cash raised from the debt doesn't alter the earnings and doesn't directly lead to a change in the market perception of the company's value, the P/E ratio remains unchanged. Therefore, under the assumption that the cash is simply held and does not lead to an immediate increase in earnings, the correct answer is that the P/E ratio remains unchanged.