ethelbert is a young software company owned by two entrepreneurs. It currently needs to raise 400000 to support its expansion plans. A venture capitalist is prepared to provide the cash in return for a 40% holding in the company. Under the plans for the investment, the VC will hold 10,000 shares in the company, and the two entrepreneurs will have combined holdings of 15,000 shares. What is the total after-the-money valation of the firm.

$1,000,000

Explanation:

The fund raised by the company through venture capital is $400,000 in return for 40% holding in the company.

Venture capitalist holds 10,000 shares and it represents 40% of total holdings.

Assume that the total value of firm is x. The venture capitalist will hold 40% of total capital which equals to $400,000. The total value of firm will be

40% * x = 400,000

x = 400,000/40%

x = 400,000/0.4

x = 1,000,000

Hence, the after value of firm will be $1,000,000

The law of diminishing return is that marginal return states that, at some point that adding an additional factor of the production results in smaller increases in the output. Hope it helps!