Question

Big Mutual Insurance Company would like to take advantage of financial services deregulation by acquiring a bank and a stock brokerage firm. Big Mutual, however, would have trouble raising the funds needed to make these acquisitions under the mutual form of organization. Big Mutual is planning to switch from the mutual form of organization to the stock form, and to issue shares of common stock to raise capital. This change in organizational structure is called

a) Demutualization
b) Mutualization
c) Consolidation
d) Monetization

Answer 1

The transition from a mutual to a stock company structure for capital raising is known as demutualization. Shareholders vote for a board of directors to manage the company, and banks act as financial intermediaries in the economy.

Step-by-step explanation:

The change in organizational structure from a mutual form of organization to a stock form, for the purpose of issuing shares of common stock to raise capital, is called demutualization. Shareholders of a company typically select company managers through a board of directors, which they elect. As shareholders, they have a say on major decisions through voting rights proportional to their ownership. Banks are referred to as financial intermediaries because they facilitate financial transactions between savers and borrowers, turning savings into investments or loans. When considering raising funds for a major business expansion, the decision between issuing stock or borrowing depends on the desire to maintain control of the company and risk tolerance. Borrowing maintains control but comes with the commitment to repay with interest, while issuing stock dilutes ownership but doesn't require repayment.