The Wall Street Journal Weekly Quiz

The Wall Street Journal Education Program

Weekly Review & Quiz

Covering front-page articles from September 17 – 23, 2005

Professor Guide with Summaries Fall 2005 Issue #5

Developed by: Scott R. Homan Ph.D., Purdue University

Questions 1 – 12 from The First Section, Section A

Looking Upscale, Wal-Mart Begins A Big Makeover

ANN ZIMMERMAN and KRIS HUDSON

September 17, 2005; Page A1 http://online.wsj.com/article/0,,SB112690809217043498,00.html

Wal-Mart Stores Inc. has begun a fundamental rethinking of the formula that made it the world's largest retailer. Wal-Mart grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the

American economy, it is changing the way it does business to reach out to more upscale shoppers. This month, Wal-Mart unveiled an eight-page advertising spread in Vogue that uncharacteristically emphasized fashion, such as a leopard-print tank top with pink lace, instead of price. On Monday night, the huge public screen in Times Square will display video from Wal-Mart's first New York fashion show. The Bentonville, Ark., company even has a trend-spotting outpost now in the U.S. fashion capital. Wal-Mart has created a store prototype with wider aisles, lower shelves and more elegant displays of pricey products. The retailer once prided itself on selling the first DVD player under $100. Now it also offers 42-inch flat-panel plasma TVs for $1,648 to $1,998. It's a significant gamble, because lower-income rural shoppers have always been the core customers of this nearly $300 billion-a-year company -- bigger than any other non-oil company, measured by sales. In 2004, Wal-Mart sales represented 7.58% of all non-auto U.S. retail sales. William Cody, managing director of the Baker Retailing Initiative at the University of Pennsylvania's Wharton School, says Wal-Mart is the most dominant retailer in U.S. history in terms of sales as a percentage of gross domestic product. But Wal-Mart needs to shake things up. Its sales at stores open at least a year, a key measure of retailing performance, have been lagging. Over the past year, such sales at more fashionable

Target Corp. have been rising twice as fast as those at Wal-Mart. Wal-Mart's share price, which hit a 52-week low yesterday, is down 17% in the past year, while Target's has risen

18%. The sense of crisis sank in last holiday season. During December, Wal-Mart stores were instructed to display items under $2 in the prominent places at the end of aisles, in an appeal to financially squeezed shoppers. But sales were disappointing. "We went the wrong direction," Wal-Mart Chief Executive Lee Scott told analysts this June, reflecting on the failure. "You can't just spend all your time chasing a customer who is going through that economic cycle." Across its 3,100-store empire, Wal-Mart is deploying a

340-person squad to enforce new "rack rules." In a Wal-Mart supercenter in Cullman,

Ala., Joel Ewing recently snatched a group of peach-colored, beaded tunics from a circular rack and put them on a rack with four outspread arms.

© Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 1 of 26

The four-way racks hold fewer items but allow shoppers to glimpse a garment's style and detail. "Putting out less merchandise can translate into more sales, because customers can really see what you have," explained Mr. Ewing as he surveyed departments with the store manager in tow. "But here, that is not an easy lesson to teach." Wal-Mart's predicament reflects broader changes in the U.S. The country's uneven economic recovery over the past couple of years has benefited high-income Americans more than the traditional Wal-Mart customer, who values price over image. Even before Hurricane

Katrina pushed gasoline over $3 a gallon, rising pump prices were having a disproportionate effect on working-class Americans because fuel represents a much bigger slice of their budgets. Executives now say Wal-Mart needs to appeal to the shopper who loves a great deal on socks but also can splurge on merchandise with fatter profit margins, such as 400-thread-count sheets or a stereo. Where Wal-Mart's mantra was once "stack it high, watch it fly," its fashion police have a new set of rules. There's the "one-hand rule": Racks shouldn't be stuffed so full that shoppers have to tug at a hanger with both hands. All racks should be 4-feet, 6-inches tall, so shoppers can see over them to apparel hanging on the walls. Thirty-six inches should separate one rack from another. After surveying its customers and concluding they were "starved for fashion,"

Wal-Mart has started to bring in more stylish merchandise. The company still does all its apparel buying out of Bentonville. But two years ago, it opened the New York office, located on Fifth Avenue near the Empire State Building, to spot hot styles. Last year, the office persuaded headquarters to take a chance on long, patterned skirts embellished with sequins. They sold out in all stores within weeks. "Fashion and creativity are not centered in Bentonville," says Celia Clancy, a Wellesley College graduate and former employee of

Filene's Department Store, who runs strategic planning for the New York office. "To excel and be credible in apparel and home furnishings, this had to happen."

1. Wal-Mart’s recent emphasis on clothing has been it’s: a. Quantity b. cheapest price c. stylish fashion sense Correct d. range of sizes

2. As opposed to the old “stack it high, watch it fly” concept, Wal-Mart’s “new rack rules” make sure that: a. high end merchandise is kept strictly separate from inexpensive items b. there is easy viewing and removal of clothing merchandise from display racks Correct c. 4-way racks hold as much as possible without falling over d. displays should be as close together as possible to ensure the customer sees everything and can grab items from two separate displays at the same time.

Split Decision Reforms in Doubt As Germany's Vote Brings Deadlock

By MARCUS WALKER and IAN JOHNSON



BERLIN -- Germany plunged into political turmoil as its election produced no clear winner, raising the specter of weeks of wrangling over the formation of a new government and delays in measures to lift the long-struggling economy. Angela Merkel's center-right opposition won 35.2% of the votes, edging out incumbent Chancellor

Gerhard Schroeder's center-left government with 34.3%. Each side was too weak to form an immediate majority in the German parliament. Both candidates are claiming the right to be the next leader of the world's third-largest economy and both say they have a mandate to round up enough votes from other parties to form a working majority. The results may force Mr. Schroeder and Ms. Merkel, bitter rivals, to collaborate and form a coalition together. That in turn could produce an unstable government and possibly another election soon. Ms. Merkel, seeking to be the first eastern German and first woman to lead Germany, has long been an outsider willing to introduce radical departures from Germany's economic traditions. She wants to deregulate the country's labor market, simplify the tax system and cut the burden on businesses of paying for the welfare state. German businesses and investors mostly rooted for a clear Merkel victory.

They hoped it would lead to new measures to address an aging population and rising world-wide competition for jobs. The German DAX stock-market index has risen about

14% since the election was scheduled. Advocates of freer markets in the rest of Europe hoped for a decisive vote that would influence the entire continent, which like Germany is struggling to escape slow growth and high unemployment. German unemployment stands at 11.4%, close to a postwar record rate. Ms. Merkel's failure to win a majority, although partly due to campaign mistakes, shows the difficulty of winning elections in

Western Europe on a platform of potentially traumatic economic medicine. That may chill any drive for change in other countries, such as France, where tentative efforts have met with similar opposition. Many analysts were expecting both the German stock market and the euro to dive at least initially today because of the uncertain outcome.

"This was clearly a vote against reform. It's clear that Germans are unwilling to embrace this," said Gary Smith, head of the American Academy in Berlin. Ms. Merkel's showing was one of the worst by a Christian Democratic leader since World War II. Her campaign blew a wide early lead after a series of missteps. Ms. Merkel, a former physicist, stumbled in television appearances -- confusing gross and net income, stuttering in a panel discussion and appearing wooden in a TV duel with Mr. Schroeder. She left many voters fearing that her proposals would bring much pain but no gain for average wageearners. Europe, especially the 12-nation euro currency area, has become the missing engine behind the global economy in recent years. While China and India industrialize at high speed and the U.S. expands its lead in new technologies, much of Western Europe has struggled to come to terms with the competition. The traditionally dominant economies on the Continent -- Germany, France and Italy -- have only made limited changes to generous welfare entitlements and labor protections that weigh down businesses and constrict job creation. Amid Germany's economic stagnation and mass unemployment, most analysts considered Chancellor Schroeder doomed to defeat. Early polls put him more than 20 percentage points behind. But he roared back in the final weeks, and the official tally from 298 of 299 districts put his party less than a percentage point behind Ms. Merkel's. (The final district will vote on Oct. 2.)

3. Germany is the world's ______________________ economy.


a. fifth - largest b. third - largest Correct c. third - smallest d. sixth - largest

4. Ms. Angela Merkel's is seeking to be the first ______________ to lead Germany. a. citizen from Switzerland b. non-native c. person under 25 years old d. woman Correct

Boeing, Airbus Foresee Peak Year For Orders Despite Airline Woes

By DANIEL MICHAELS and J. LYNN LUNSFORD


Even as the global airline industry faces losses of as much as $8 billion this year amid soaring fuel prices, Boeing Co. and Airbus are cruising toward a banner year for plane orders. Coming back strongly from the worst aviation slump on record, the two manufacturers together have booked contracts for almost 1,000 planes and have commitments for several hundred more. With continuing campaigns to sell to carriers including Singapore Airlines, Qantas Airways of Australia and Dubai's Emirates Airlines

-- the two combined may top their best year on record, 1989, when they announced 1,528 new orders. John Leahy, chief operating officer and top airplane salesman at Airbus, acknowledged that it was shaping up "to be a record year in terms of orders." Aerospace executives caution that orders are essentially promises to buy planes in the future, often cemented by a deposit of about 10% of an airplane's price, and don't constitute significant sales revenue. Boeing and Airbus receive full payment only as planes are built and delivered over the duration of a contract. In the past, many orders have quietly evaporated or been postponed, or later switched to other models. After the rush for orders, the next few years may be comparatively slow for sales teams, because carriers that sign big deals today are unlikely to make substantial purchases again soon. Some of the recent orders have exceeded 100 planes, many of which will be delivered over periods as long as 10 years. Mr. Leahy of Airbus noted that a market peak in the late 1980s was followed by several slow years as sales dried up. Still, orders provide a barometer of how airline managers view their prospects. A record order book indicates they are looking beyond today's problems to significant future growth. Moreover, the resurgence in demand hasn't been affected by a simmering trade dispute between the U.S. and the European Union over subsidies for the two companies. A machinists strike at Boeing since the beginning of September has shut down the assembly line and could delay future deliveries, but carriers place orders with a long view that isn't likely to be much affected by the current strike. The boom in orders partly represents demand that built up after the airline industry went into a nose dive in mid-2001. It also comes as airlines replace fuel-guzzling old planes with more-efficient new models. Many of the new orders are for planes still under development -- the Boeing 787 "Dreamliner" and the competing Airbus A350 -- which won't be delivered for almost three years. Many of the purchases are coming from airlines


outside the U.S., which are in generally better shape than American carriers. Two giant

U.S. airlines went into bankruptcy proceedings recently amid surging prices for jet fuel.

Boeing's top airplane salesman, Scott Carson, said the main factors driving the current resurgence are a strong recovery in the demand for cargo aircraft and tremendous growth in China and India. In India alone, airlines have announced orders for more than 200 planes this year as they scramble for market share after the recent deregulation of the aviation market. Even airlines from struggling economies in Africa and Latin America are placing orders for new planes rather than turning to the used-airplane market as they have in the past. Mr. Carson said the health of U.S. airlines will determine whether airplane sales remain strong next year. If U.S. carriers don't recover, he said, the order books at Boeing and Airbus "will be smaller, but not Death Valley." For U.S. carriers, the most recent challenge is fuel prices. The International Air Transport Association estimates that at an average fuel price of $57 per barrel of Brent North Sea crude oil this year, North American airlines will lose a combined $8 billion. European carriers should break even at that price, and Asian airlines together should post a profit of about $1 billion. Most of the U.S. losses are at six major carriers. As Tropical Storm Rita gained strength yesterday, threatening Gulf Coast oil production and refineries, the price of U.S. benchmark crude-oil futures for October delivery shot up $4.39 a barrel on the New York

Mercantile Exchange, settling at $67.39. In London, benchmark Brent futures for

November rose $3.80 to $65.61. ( See related article.

1

) The challenge for Airbus and

Boeing in coming years will be to turn the peaks and troughs of orders into a steady flow of deliveries. Some people in the industry warn that a surge in orders could prompt the rivals to accelerate production too quickly, setting themselves up for a sharp drop in deliveries when the market deteriorates.

5. Coming back strongly from the worst aviation slump on record, Boeing Co. and Airbus have booked contracts for almost _________________ planes. a. 100 b. 1,000 Correct c. 10,000 d. 100,000

6. Even as the global airline industry faces losses of as much as _______ this year amid soaring fuel prices, Boeing Co. and Airbus are cruising toward a banner year for plane orders. a. $8 billion Correct b. $8 million c. $80 billion d. $80 million

Fed Keeps Focus On Inflation And Raises Rate

By GREG IP



WASHINGTON -- The Federal Reserve raised interest rates for the 11th consecutive time, concluding that Hurricane Katrina's impact on inflation is more worrisome than its effect on growth. The Fed raised its short-term interest-rate target to 3.75%, from 3.5%. It indicated that it expects to raise the rate further at a "measured" pace, which has come to mean an increase of one-quarter percentage point at each meeting of Fed policy makers.

The decision to raise rates and to signal more ahead amid the uncertainty created by

Katrina as well as some political pressure to take a break attests to the Fed's mounting concern over inflation. Fed Chairman Alan Greenspan appears more willing to risk slowing the economy down by raising rates too much, then to risk letting inflation rise further by raising them too little. Tuesday's increase wasn't wholly expected: A minority of economists thought the Fed would pause to assess Katrina's impact. And some Fed officials wanted to do so. Fed Governor Mark Olson cast the lone dissent Tuesday, breaking a two-year stretch of unanimous votes. In a statement, the Fed acknowledged

Katrina's "tragic toll," but predicted it wouldn't derail the economy's expansion, and may aggravate inflation. "The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term," the Fed said. "While these unfortunate developments have increased uncertainty about near-term economic performance, it is the [Fed's] view that they do not pose a more persistent threat."

Economic growth, it said, would be supported by still-low interest rates and brisk productivity growth, while "higher energy and other costs have the potential to add to inflation pressures." It did say that underlying inflation is "relatively low" and longerterm inflation expectations are "contained," but this was less sanguine than the statement following its Aug. 9 meeting, which called such expectations "well contained." In June of last year, the federal funds rate, charged on overnight loans between banks, stood at a 46year low of 1%. The Fed's goal since then has been to return rates to a "neutral" level that neither fuels inflation nor restrains growth. Estimates of neutral range from 3% to 5.5%.

Financial markets now expect only one more quarter-point rate increase during the three remaining meetings before Mr. Greenspan's term ends Jan. 31 -- and possibly one more by next summer. In response to the Fed move, commercial banks raised their prime lending rate, a benchmark for many short-term business and consumer loans, to 6.75% from 6.5%. Longer-term lending rates will be little affected, however, as bond markets, where long-term rates are set, had anticipated Tuesday's action and showed little response.

7. The Federal Reserve ____________________________ for the 11th consecutive time, concluding that Hurricane Katrina's impact on inflation is more worrisome than its effect on growth. a. adjusted interest rates down b. raised interest rates Correct c. lowered interest rates d. eliminated interest rates

8. The Fed short-term interest-rate is ________________. a. 3.75 % Correct b. 6.75 %


c. 9.75 % d. 13.75 %

Hip Check American Express Tries to Find Its Place With a Younger Crowd

By ROBIN SIDEL


American Express Co., the 155-year-old financial-services firm long known for catering to gray-haired executives with expense accounts, is offering its customers some unusual new perks: free chocolate martinis, discount passes to New York's head-thumpingly loud

Crobar, and the chance to be a disc jockey at a dance club overlooking Times Square.

The offers are part of an ambitious effort by American Express to tackle a serious problem at the core of its business. The U.S. market is saturated with nearly 900 million credit, charge and debit cards. The glut has started to slow several years of rapid industry growth. Credit-card payments increased at an annual rate of 6.7% between 2000 and

2003, but the growth rate is now expected to taper off, according to the Federal Reserve.

More alarming for American Express: Young shoppers are shifting to debit cards.

Particularly popular among people on a budget, debit cards draw directly from a person's bank account, with no annual fees or monthly balances. Debit-card charges now represent

60% of transactions processed by Visa USA Inc. But American Express has never offered a debit card, and executives say it doesn't plan to. Even its venerable gold and platinum charge cards are under assault. Visa and MasterCard International Inc. are both promoting credit cards with premium perks like concierge services that help customers buy hard-to-get tickets to concerts and shows. Some Wall Street analysts think American

Express may have to lower the fees it charges merchants for accepting its cards. Those fees, which average about 2.54% of each transaction, have long been the highest in the card industry. Rates set by Visa and MasterCard averaged 1.78% last year, according to the Nilson Report, a publication that tracks the industry. So now American Express is on a high-stakes hunt for young customers, forcing the company to learn the byways of an unfamiliar new marketplace. At the center of its quest is a new series of no-fee credit cards for urbanites who are single, age 25 to 35, dine out often, like to drink and aspire to be hip. In ads, American Express dubs this "the über-glam lifestyle you'll easily become accustomed to." Last year it launched the first city card, dubbed "In:NYC," and aimed at

New Yorkers. Earlier this week it followed with "In:Chicago," and "In:LA" is coming out later this year. To develop the cards, American Express's executives have been scouring city hotspots trying to divine the tastes of the often fickle urban crowd. They grilled company interns about what restaurants and trends were cool, and found themselves soliciting customers well after midnight on Manhattan's streets. The result is a card promising "access" to a lifestyle American Express hopes is desirable. Instead of earning golf clubs or frequent-flier miles, points accumulated on the In:NYC card can be redeemed for a private booth at Underbar, a candle-lit lounge below Union Square's W

Hotel, or to get discounts at Suba, a tapas restaurant where diners sit surrounded by a pool of rippling water. The push for new customers comes at a critical time for American

Express. The company has posted 14 consecutive quarters of double-digit earnings growth, and at $57 its shares are trading at their highest point in nearly five years. In


2004, American Express earned $3.4 billion, and Chief Executive Kenneth Chenault has set long-term goals for 12% to 15% earnings per-share growth. "I happen to have a lot of confidence that our growth in payments is sustainable," Mr. Chenault told investors during a meeting last month. American Express has thrived so far by driving up spending on its cards. After widening its network of merchants, the company has successfully encouraged its cardholders to charge more everyday purchases, like gasoline and groceries, on its cards. Such daily purchases now account for more than 60% of spending on its cards, up from 35% in 1990. Company executives are also looking to expand

American Express's reach in new areas. American Express has started processing payments for a general consumer credit card being issued by MBNA Corp., and it expects to field a similar card with Citigroup Inc. next year. American Express has even rolled out a technology in some drugstores that lets consumers save time shopping by simply waving their cards in front of an electronic reader. The In:NYC card is the most visible example of American Express's strategy to attract new business. Don Chapman, the company's head of business development, says he and two colleagues first came up with the idea for a New York card in 2002 during a two-week brainstorming session at

American Express's lower Manhattan headquarters. Mr. Chapman's team wanted to capitalize on the popularity of lifestyles depicted in television shows such as "Sex and the

City" and "Friends." Company data showed these young adults were less likely to already have an American Express card. Market data also suggests they spend heavily at businesses that accept cards. Residents of Manhattan between the ages of 25 and 34 are

36% more likely than people of the same age elsewhere in the country to go to bars, nightclubs or out dancing, according to Simmons Market Research Bureau, a unit of

Experian Inc. "They go out all the time, they don't have big kitchens, they like being social and their apartments are just a place where they sleep," Mr. Chapman says.

Reaching Out for Help Mr. Chapman, a 41-year-old father of two and a Led Zeppelin fan, realized early on that American Express would need help courting customers as much as a generation younger than its typical cardholders. The company organized focus groups and Mr. Chapman began bouncing ideas off American Express's newer staff members and interns. "I'd pick out the youngest, hippest person in the office and ask their opinion," he says. One idea that played badly with the younger set: emblazoning the card with a

New York landmark. Destinations like the Statue of Liberty seemed touristy, not fashionable. Pictures of neighborhoods, park benches and pigeons also fell flat. American

Express's internal art department eventually designed a sleek black card with the letters

"In:NYC" printed on a window of clear plastic. Young New Yorkers also told American

Express they coveted access to social opportunities viewed as off-limits, such as invitations to an exclusive party or sitting in the VIP area at popular nightclubs.

Once the card's basic idea was established, Mr. Chapman handed the project over to a group of about a dozen American Express employees, including E-Bai Koo, a 33-yearold executive put in charge of signing up card customers. A native New Yorker who attended the exclusive Dalton School and likes Ferragamo shoes, Mr. Koo fit squarely in the card's target market.

9. Credit-card payments increased at an annual rate of 6.7% between 2000 and 2003, but the growth rate is now expected to _______________, according to the Federal Reserve. a. increase 12.5 %


b. triple c. double d. taper off Correct

10. The traditional American Express gold and platinum cards are _______ cards. a. restaurant club b. debit c. credit d. charge Correct

Battling Google, Microsoft Changes How It Builds Software

By ROBERT A. GUTH


REDMOND, Wash. -- Jim Allchin, a senior Microsoft Corp. executive, walked into Bill

Gates's office here one day in July last year to deliver a bombshell about the next generation of Microsoft Windows. "It's not going to work," Mr. Allchin says he told the

Microsoft chairman. The new version, code-named Longhorn, was so complex its writers would never be able to make it run properly. The news got even worse: Longhorn was irredeemable because Microsoft engineers were building it just as they had always built software. Throughout its history, Microsoft had let thousands of programmers each produce their own piece of computer code, then stitched it together into one sprawling program. Now, Mr. Allchin argued, the jig was up. Microsoft needed to start over. Mr.

Gates resisted at first, pushing for Mr. Allchin's group to take more time until everything worked. Over the next few months, Mr. Allchin and his deputies would also face protests from programmers who complained he was trying to impose bureaucracy and rob

Microsoft of its creativity. "There was some angst by everybody," says Mr. Gates of the period. "It's obviously my role to ask people, 'Hey, let's not throw things out we shouldn't throw out. Let's keep things in that we can keep in.' " Ultimately, Mr. Allchin's warning proved cathartic and led to what he and others call a transformation in Microsoft's most important product. A key reason: the growing threat from rivals such as Google Inc.,

Apple Computer Inc. and makers of the free Linux operating system. In recent years these companies have been dashing out some software innovations faster than Microsoft.

Google has grown particularly effective at introducing new programs such as email and instant messaging over the Internet, watching how they perform and regularly replacing them with improved versions. Microsoft's Windows can't entirely replicate that approach, since the software is by its nature a massive program overseeing all of a computer's functions. But Microsoft is now racing to move in that direction: developing a solid core for Windows onto which new features can be added one by one over time. As always,

Microsoft's great fear is that it will lose its near-monopoly on computer operating systems and basic office software. In the short term, there is little danger of that. But the more

Google and other software makers encroach on Microsoft's turf, the greater the chance that someday computer users will wake up and find Microsoft Windows superfluous.

"What happened when the American car companies failed to update their manufacturing


lines? There was a more efficient way to bring cars to market for a lower price and they lost their market," says Microsoft Vice President Chris Jones. "We're in a little bit of a different industry but it's the same thing." Microsoft's holy grail is a system that cranks out a new, generally bug-free version of basic Windows every few years, with frequent updates in between to add enhancements or match a competitor's offering. The Longhorn crisis helps explain the sweeping restructuring that Microsoft Chief Executive Steve

Ballmer announced this week to organize the company into three major business units. A key goal is to force Microsoft to be more nimble in producing and delivering software.

Mr. Allchin's reforms address a problem dating to Microsoft's beginnings. Old-school computer science called for methodical coding practices to ensure that the large computers used by banks, governments and scientists wouldn't break. But as personal computers took off in the 1980s, companies like Microsoft didn't have time for that. PC users wanted cool and useful features quickly. They tolerated -- or didn't notice -- the bugs riddling the software. Problems could always be patched over. With each patch and enhancement, it became harder to strap new features onto the software since new code could affect everything else in unpredictable ways. The 53-year-old Mr. Allchin, who joined Microsoft in 1990 and is now co-head of the Platform Products and Services

Division, says he always disdained the fast-and-loose culture of PC software. The holder of a doctorate in computer science, Mr. Allchin craved discipline in code writing. But in the booming 1990s, when it seemed Microsoft could do no wrong, there was little Mr.

Allchin could do. As soon as Microsoft was done with one version it pushed on to the next. Mr. Allchin was haunted by what he calls his "little demons." In 2001 Microsoft made a documentary film celebrating the creation of Windows XP, which remains the latest full update of Windows. When Mr. Allchin previewed the film, it confirmed some of his misgivings about the Windows culture. He saw the eleventh-hour heroics needed to finish the product and get it to customers. Mr. Allchin ordered the film to be burned.

11. Last year Jim Allchin, a senior Microsoft Corp. executive, walked into Bill Gates's office and told him the new version of Windows software, code-named Longhorn

_______________________________. a. was going to put Apple Computer out of business b. was going to put Google out of business c. was so complex its writers would never be able to make it run properly Correct d. was going to be ready by January 2006

12. In 2001 Microsoft made a documentary film celebrating the creation of Windows XP, after viewing it Jim Allchin, a senior Microsoft Corp. executive ordered the company to

__________________________. a. make 1 million copies b. put it on the web for free distribution c. send it to Apple Computer d. burn it (using real fire) Correct

Questions 13 – 18 from Marketplace, Section B


Green Thumb Follow the Money, Frequent Fliers

By RON LIEBER

September 17, 2005; Page B1 http://online.wsj.com/article/0,,SB112691505517043757,00.html

Passionate collectors of frequent-flier miles are losing out on some of the best deals in the credit-card industry. The fact that Delta Air Lines and Northwest Airlines joined US

Airways Group and UAL Corp.'s United in bankruptcy court this week should be enough to give travelers pause. But let's just assume, for the sake of argument, that all the major airlines will survive. And pretend -- and this is a big stretch -- that you'll be able to redeem those miles whenever you want to, wherever you want to go. Even so, the miles you earn from using credit cards are no longer the most valuable reward you can get, in most cases. The better choice is simple: cold, hard cash refunds. There are currently a number of cash-back cards slugging it out for supremacy. The Citi Dividend Platinum

Select MasterCard and the new Chase Cash Plus Rewards Visa both give 5% cash back at gas stations, grocery and drug stores, and 1% everywhere else. Others deliver 3% back on restaurant purchases or 2% on all purchases as long as the refund goes into a college savings account. Getting up to five cents back for every dollar charged instead of one mile for every dollar spent (which is what most of the airline mile cards offer) makes sense only if a mile is worth less than five cents. Is it? The short answer is, almost always. Sometimes, in fact, miles are worth only a penny. Here's the math: Most people redeem miles for domestic plane tickets in coach class. So, if you used 25,000 miles to book a ticket priced at $250 on the open market, you'd be getting only a penny per mile of value for that trip. Only if you use your miles for free international seats in first or business class do you start to see more than a 5% return on your rewards. A first-class trip to Sydney on United requires 120,000 miles. A round-trip in January could cost over

$16,000, valuing the miles above 13 cents each. Similar logic applies to the Membership

Rewards points from an American Express card. Turn those points into miles, and the same math applies. Trade them for merchandise and you rarely get more than a penny of value per point. The best way to exploit card issuers' largesse is to use cash-back cards only at retailers where rebates are highest. For instance, the Citi and Chase 5% cards offer the biggest rebates at gas stations, grocery and drug stores. Then, keep using your miles-earning card for all other spending if you're saving up for a big international trip in a premium cabin. Or, pull it out if you need just a few more miles to reach a threshold for a particular ticket.

13. The most valuable reward you can get from credit card point programs is typically

______________________________. a. merchandise b. cold, hard cash refunds Correct c. hotel rooms d. gas

Stringer Faces First Big Test As Sony's Chief


By PHRED DVORAK


TOKYO -- When Howard Stringer first spoke to shareholders in June as Sony Corp.'s new chief executive officer, one thing left many of his Japanese listeners scratching their heads: his jokes. Mr. Stringer's ready sense of humor was a sure ice-breaker during the eight years he headed Sony's U.S. operations. In Japan, where CEOs don't horse around at shareholders' meetings and English-speakers have to be witty through an interpreter, much of the fun was lost in translation. One that fell especially flat: In describing how he got his job offer at a Japanese restaurant that served live, jumping shrimp, Mr. Stringer quipped, "I didn't know whether to take the job or save the shrimp." Figuring out how to make Japanese laugh is just one of many things Mr. Stringer is learning as he prepares for his first big test of leadership on Thursday. He is scheduled that day to unveil his plans for turning around Sony's struggling electronics business, where flagging profits and morale prompted Sony's former chief executive, Nobuyuki Idei, to step down in June.

It is an urgent task. Investors and analysts say they are looking for clear, manageable goals and concrete plans for attaining them -- especially given the wide-ranging skepticism that greeted Sony's last strategy move, in which Mr. Idei pledged to raise

Sony's operating profit margin to 10% by March 2007. As of March 2005, it was languishing at around 1.6%. Mr. Stringer has said he will work on narrowing the company's focus in electronics, streamlining management and reworking the organization so that it is leaner, faster and more unified. He already has started some of that streamlining in the upper management levels, reducing the number of top posts available.

Some other options analysts and investors have broached: trimming the low-end Aiwa brand of electronics or the ultrahigh-end Qualia brand, reducing research spending in iffy areas like robots, and selling or consolidating some of Sony's many independent business units. Two units often rumored to be for sale are the financial-holdings unit -- including a bank and life insurer -- and a unit that operates a communications network in Japan. Sony previously has said it will list a portion of the shares in each one as early as next year but denies making plans to sell them off altogether. There are plenty of other units to let go of: As of March 31, the company had 913 subsidiaries and 56 affiliates. Mr. Stringer's performance will be doubly watched here, because he is a still-rare example of a relative outsider brought in to run one of Japan's big corporations. Professional managers may be the norm in the U.S., but Japanese companies long have been run by hand-picked insiders

-- operations experts who grew up in the company culture, wearing the company badge and singing the company song. That has been slowly changing in recent years, as growing numbers of Japanese firms -- particularly troubled ones -- turn to outsiders to fix problems that insiders haven't been able to tackle. One of Japan's most famous examples is Carlos Ghosn, the Brazilian-born Frenchman who, as chief executive of Nissan Motor

Co., implemented the kind of sweeping layoffs the car company's previous bosses couldn't bring themselves to do. This year, companies such as electronics maker Sanyo

Electric Co. and retailer Daiei Inc. also have tapped outsiders -- in both cases, Japanese women -- to top executive posts.


14. Mr. Howard Stringer, Sony Corp.'s new chief executive officer, is a relatively rare phenomenon in Japan because _____. a. he used to be a professional comedian b. he worked his way up from the entry level of the company c. he is an outsider brought in to run one of Japan’s biggest companies

Correct d. he staunchly refuses to lay-off any employees

By: Bye-Bye Boomers?

By KELLY GREENE


When executives at Platte River Power Authority, an electric company in Fort Collins,

Colo., surveyed its employees 18 months ago, they were stunned by a particular finding:

40% of the company's 200 workers said they intended to retire over the next five years.

With little chance of hiring from other stretched power plants -- and apprenticeships for technicians typically taking at least four years -- executives faced a stark reality. "We've got to be moving right now," says Dave Green, human-resource manager. He is scrambling to hire trainees and recently created a new job -- plant assistant -- to fill apprenticeships as soon as they open up. Across a wide swath of industries, companies are starting to address the impending exodus of baby boomers -- the 76 million

Americans born between 1946 and 1964. The oldest boomers will begin turning 60 years old next year. Just two years later, they can start collecting Social Security benefits.

Many company retirement benefits kick in around the same time: most workers in traditional, defined-benefit pension plans become fully vested between the ages of 55 and

62. And those with 401(k)s or other defined-contribution plans can tap them with no restrictions starting at age 59½. Many baby boomers, of course, may decide to stay on the job longer than previous generations -- particularly to shore up savings. Still, the number of potential retirees is stark: more than 40% of the U.S. labor force will reach the traditional retirement age by the end of this decade, according to a new study by the

Conference Board, a New York research organization. In the next seven years, the number of U.S. workers between ages 55 and 64 will grow 51% to 25 million, meaning the fastest-growing portion of the work force is the one at most risk of retiring soon. At the same time, the number of workers between ages 35 and 44 is expected to shrink by

7%. Some sectors could be particularly hard-hit. About half the country's 400,000 electric-utility workers, such as those at Platte River, will be eligible to retire in the next five years, says Michael Ashworth, a researcher at Carnegie Mellon University in

Pittsburgh. Half the U.S. government's civilian work force will also be eligible to retire in the same time period. And 40% of the manufacturing work force is expected to retire in the next 10 years, the National Association of Manufacturers warns. Overall, that could leave a shortage of five million skilled workers between 2010 and 2012.

15. According to a new study by the Conference Board, a New York research organization, more than __________ of the U.S. labor force will reach the traditional retirement age by the end of this decade.


a. 10% b. 20% c. 40% Correct d. 70%

Marshall Field's Becomes Macy's as Era Ends

By ELLEN BYRON


In 1896, as legend has it, the wife of U.S. President-elect William McKinley called on

Marshall Field's Chicago department store to create her inaugural gown.

"Give the lady what she wants," store founder Marshall Field responded, a command that became the retailer's motto for more than 100 years. Beginning next year, the iconic script nameplate will cease to exist. Federated Department Stores Inc., which acquired

Fields' parent, May Department Stores Co., earlier this year, announced yesterday that it would convert all of the 62 Field's stores to the Macy's name. Federated also plans to cut as many as 6,200 jobs, or about 5% of May's work force, next year as it embarks on a massive integration effort to combine the two companies. The $11.9 billion deal, completed in August, creates a department-store behemoth of about 950 stores nationwide and more than $30 billion in sales. The decision provoked a storm of outcry in Chicago, where generations of shoppers grew up having afternoon tea in Marshall

Field's famous Walnut Room, admiring its annual Christmas tree and buying its ownbrand Frangos mints. More than just a retailer, Marshall Field's has long been synonymous with Chicago, where Mr. Field, the founder, and his heirs were among the city's most prominent philanthropists, helping fund some of the city's landmarks including the Field Museum, the University of Chicago and the Merchandise Mart.

"I think it's a crime," said Ashley Corotis, a 28-year-old Chicago lawyer, echoing a widespread sentiment. "I bought my wedding dress there. It's a shopping institution. They are losing that history." The end of Marshall Field's is just the latest in a long string of moves by Federated to create a national department store brand. Faced with competition from retail giants like Wal-Mart Stores Inc. on the low end and specialty stores owned by

Neiman Marcus Group Inc. on the high end, Federated has said that a unified national chain under a single umbrella brand is the only way it can compete. "Certainly in the

Chicago market there is emotion with the name of Marshall Field's, and we have a lot of respect for that -- these are hard decisions," Federated Chief Executive Officer Terry

Lundgren said in an interview yesterday. "But where can you take that business, how do you expand it, how do you grow it? It didn't have national potential." Federated worked with marketing and consumer-research experts before making its decision, Mr. Lundgren said. It conducted mall surveys, a phone campaign and focus groups to determine that folding the storied chain into the larger Macy's business made sense. A key consideration: The Macy's shingle permits the 62 Field's locations to participate in

Federated's plans to significantly increase Macy's national advertising presence. "It would have been a missed opportunity for Chicago to not be a part of this," Mr. Lundgren said.

With the exception of its upscale Bloomingdale's division, Federated earlier this year converted all of its chains -- including Rich's, Burdine's and Goldsmith's -- to the Macy's


nameplate. Yesterday, Federated reiterated its intention to convert the rest of May's longtime nameplates to Macy's, including the Filene's, Hecht's and Robinson-May chains.

Lord & Taylor could also disappear: Federated said it intends to study the division and determine its future by the end of its fiscal year in January.

16. Marshall Fields, which will soon take on the name Macy’s has long been associated with which major city? a. New York City b. Chicago Correct c. Los Angeles d. Dallas

New Search Engine From Microsoft Gets Cool Welcome

By KEVIN J. DELANEY and ROBERT A. GUTH


With the major reorganization it announced this week, Microsoft Corp. is trying to move more quickly and aggressively against Google Inc. and other nimble competitors. But the recent experience in the Web search realm by Microsoft's MSN unit -- regarded as one of the more agile parts of the software giant's empire -- suggests that even Microsoft's best efforts can face a tough time gaining ground on Internet rivals. Microsoft in February switched the search function on its Web sites from technology provided by Yahoo Inc. to

Microsoft's own search engine. Since then, Microsoft's share of Web search queries in the

U.S. has slipped, according to several research groups. A study conducted earlier this year concluded that more consumers found MSN's search results to be less relevant to their queries following the switchover, say people familiar with the matter. Meantime,

MSN executives say they have been surprised at how quickly Google has increased the average ad revenue it generates for each consumer search. Within the MSN unit,

Microsoft is pushing hard to increase the relevance of the results it returns to users. And it is planning an ambitious marketing campaign to bolster the MSN brand against Google, which commands the leading share of search queries despite buying almost no advertising. In another challenge to Google, next month in the U.S. Microsoft plans to open a test version of an automated system that will sell search advertising directly.

Currently, most of the search ads on Microsoft sites are sold by Yahoo. Microsoft says some research actually shows it is gaining ground on competitors. "It couldn't be further from the truth than to say that we haven't made fast progress," says Yusuf Mehdi, a

Microsoft senior vice president who is heading the search effort. "We are very close to closing the gap" in the relevance of MSN's results versus those of Google, he adds.

17. With the major reorganization it announced this week, Microsoft Corp. is trying to move more quickly and aggressively against _______ and other nimble competitors. a. Google Correct b. Apple c. Wal-mart d. Sears


Managing a Hurricane -- Differently

By ROBERT BLOCK and RUSSELL GOLD


The federal preparations now under way for Hurricane Rita are very different from the efforts before, during and after Hurricane Katrina. And the differences start at the top.

The Department of Homeland Security, which oversees the Federal Emergency

Management Agency, has taken a much more central role in preparing for a potential disaster than it did for Katrina and its aftermath. Among its early actions: naming a

"principal federal officer" to coordinate the national response to the hurricane bearing down on the Texas coast, in this case Rear Admiral Larry Hereth, a Coast Guard officer.

Adm. Hereth reports directly to Homeland Security Secretary Michael Chertoff. With

Katrina, Coast Guard Vice Admiral Thad Allen wasn't appointed to head up relief efforts until almost two weeks into the disaster.

R. David Paulison, the new acting director of FEMA, said yesterday that his agency was seeking to have essential commodities such as ice, water and food in place in potentially affected areas such as Texas and Louisiana by the end of the day. In all, 45 truckloads of water and ice and 25 truckloads of meals will be ready in staging areas at federal facilities in Texas, Mr. Paulison said. More than 400 medical-team personnel and 14 Urban Search and Rescue Task Forces, meanwhile, are also staging in Texas, FEMA said.

FEMA official Gary Jones, second in command to Adm. Hereth in leading the federal effort in Texas, said there were 100 tractor-trailers filled with tarps, generators and ice at

Ft. Sam Houston in San Antonio, ready to be deployed as soon as roads were open. A similar convoy is being put together at a federal warehouse in Fort Worth, said Mr. Jones.

"We're very concerned that we lean forward and have the resources to deal with whatever comes up," said Adm. Hereth. "We need to establish what we need and then build some excess capacity." The military also is being mobilized more quickly than it was for

Katrina. Texas Gov. Rick Perry said he asked President Bush for 10,000 federal troops on

Thursday morning; by the early afternoon, the Pentagon had approved the request. The troops will be available to do "everything short of law enforcement," said Adm. Hereth, who has been dispatched to Texas from his usual post in Portsmouth, Va., where he is the

Fifth District Commander. The changes in crisis-management are largely a result of the criticism for FEMA's bungled management in the aftermath of Katrina. The shifts are also a recognition of the effective role the Coast Guard has played during the Katrina recovery, when its ships and helicopters were the first on the scene to rescue stranded residents from rooftops and floodwaters. Mr. Chertoff also chose the Coast Guard over

FEMA to be the public face of the federal response last week when the much milder

Hurricane Ophelia hit the North Carolina Coast. The new alignment also raises Mr.

Chertoff's power and profile. A former judge and federal prosecutor, he is not well versed in emergency management. But his supporters say that he is an excellent manager and that his stewardship of the department and FEMA since Katrina has provided clear and strong leadership.


Inside FEMA, meanwhile, officials see the plans taking shape for Rita as a symbol of their diminishing authority. While FEMA officials are still charged with coordinating federal assets from a myriad of departments and agencies during a disaster, they say decisions are being made now by senior Homeland Security officials. FEMA is largely being told what to do.

For their part, Texas state officials have made clear that they don't intend to repeat mistakes made during Katrina. Gov. Perry, who activated 5,000 National Guard troops and deployed 1,000 state police, said he expected the combined force would create a

"show of authority" in storm-devastated regions. On Monday, the governor recalled

Texas National Guard members and other emergency response officials from Louisiana to prepare for Rita.

18. Rear Admiral Larry Hereth has been appointed the "principal federal officer" to coordinate the national response to the hurricane bearing down on the Texas coast.

Admiral Hereth is part of the _______________ which has increasingly been deployed to assist citizens in times of national crisis. a. U.S. Coast Guard Correct b. Texas National Guard c. U.S. Navy d. Texas Ranger Sea Guard

Questions 19 – 23 from Money & Investing, Section C

Hammer Time

By JUSTIN LAHART

September 19, 2005; Page C1 http://online.wsj.com/article/0,,SB112708228717044348,00.html

Last week President Bush pledged that the U.S. government would launch "one of the largest reconstruction efforts the world has ever seen" in the hurricane-battered Gulf

Coast.

But in an odd twist, rebuilding the homes and businesses that Katrina destroyed could constrain the supply of materials and labor in the rest of the country, spelling trouble for real-estate markets all over. Average prices for framing lumber (think two-by-fours), which had been falling before Katrina, have risen by 14% since the hurricane hit, according to Shawn Church, editor of lumber-industry newsletter Random Lengths.

Average structural panel (plywood) prices have risen 38% over the same period.

Those price increases came about because Katrina suddenly put lumber in short supply, says Mr. Church. The hurricane knocked out Southern production and destroyed millions of board feet of lumber and square feet of plywood that was sitting in Gulf ports at a time retailers and distributors were keeping inventories lean. The impact of reconstruction on the prices of lumber and other important building materials, like cement and gypsum board, hasn't been felt yet. That won't hit until rebuilding begins in earnest. According to mortgage lender Freddie Mac, construction materials account for about one-third of the cost of a new home.


Carpenters, plumbers and other skilled workers may soon be in short supply in many parts of the U.S. as they flock to the Gulf to take part in rebuilding efforts. "You've already got a very tight construction business nationally," says Lehman Brothers economist Ethan Harris. "This just adds a new layer of pressure on the industry."

Home builders may have a hard time pushing higher costs onto buyers. Higher home prices and an increase, although meager, in long-term interest rates pushed home affordability to a 14-year low in July, according to Raymond James analyst Rick Murray.

19. Hurricane Katrina has caused the price of which building supply to increase dramatically? a. nails b. hammers c. lumber Correct d. bricks

Tyco Figures Will Be Jailed at Least 7 Years

By MARK MAREMONT


NEW YORK -- In an ignominious end to their once-glittering careers, Tyco International

Ltd.'s two former top executives were led away from a Manhattan courtroom with their hands cuffed behind their backs, after a New York state judge sentenced them to serve 8

1/3 to 25 years in prison for looting their former company. The lengthy prison sentences, although less than the 15-to-30-year maximum that could have been imposed, are the latest example of relatively harsh punishment being meted out to top executives in the recent wave of corporate-fraud trials. The two men were ordered to pay fines and restitution totaling about $240 million. L. Dennis Kozlowski, Tyco's former chief executive, and Mark H. Swartz, the company's former finance chief, each were convicted in June of 22 criminal charges related to looting their former employer of more than $150 million. The pair had once been among the most powerful and best-paid executives at an

American company, helping build Tyco into a conglomerate with $36 billion in annual revenue. Tyco has been under new management since mid-2002. Under New York state law, they will have to serve nearly seven years at minimum: specifically, at least six years, 11 months and nine days before being eligible for parole, subject to good behavior and other factors. Both defendants have said they will appeal. Mr. Kozlowski's lead attorney, Stephen Kaufman, said immediately after the sentencing hearing that he will be applying for bail for his client pending appeal. Charles Stillman, the lead attorney for Mr.

Swartz, said he will be "pursuing appropriate remedies for Mark's situation." In New

York, defendants can choose to bring bail applications before any judge, and often try to choose judges known for their leniency. In New York, inmates with more than six years to serve until they are eligible for parole are usually sent to one of the state's maximumsecurity prisons, which house 22,000 mostly violent offenders, said Linda Foglia, a spokeswoman for the New York State Department of Correctional Services. Prisoners in such facilities are housed in cells, and work six hours a day at tasks like sweeping, painting, or working in the library, she said, adding that inmates generally are paid $1.05


a day. Separately, Tyco is close to an agreement to pay $50 million to settle Securities and Exchange Commission fraud charges related to accounting misdeeds during the period when Messrs. Kozlowski and Swartz were in charge, according to a person familiar with the matter. Lawyers at yesterday's sentencing hearing first revealed the likely SEC charges, with a prosecutor saying the SEC staff was recommending that Tyco be charged with inflating its income by about $1 billion.

20. In an ignominious end to their once-glittering careers, Tyco International Ltd.'s two former top executives were led away from a Manhattan courtroom with their hands cuffed behind their backs, after a New York state judge sentenced them to serve

____________________in prison for looting their former company. a. 8 to 25 days b. 8 to 25 weeks c. 8 to 25 months d. 8 to 25 years Correct

Making Sense of 'Dollar Stores'

By KRIS HUDSON


The red-hot growth of "dollar stores" is cooling.

In recent years, these stores have sprouted like wildflowers as customers and investors alike embraced the novelty of stores pitching everything from candy to apparel at prices as low as 99 cents. The number of dollar stores operated by publicly traded companies jumped nearly 50% to 17,000 since 2001, according to a Citigroup Inc. analysis.

But this year has brought a slowdown as the stores face tougher competition from traditional retailers such as Target Corp. and grocery chains, which have added dollar aisles and made other tweaks. At the same time, dollar-store customers have felt their wallets pinched by soaring prices at the gasoline pump. The result: The dollar-store industry's same-store sales -- a key measure of year-over-year sales growth at stores open at least a year -- tumbled to an average rate of 0.4% in the first half of this fiscal year, down from 1.4% for all of 2004 and 4.1% as recently as 2003, according to SunTrust

Robinson Humphrey analyst Patrick McKeever. Market-research firm Retail Forward predicts that the industry's overall sales -- from new and older stores -- will slip to average annual growth of 5.4% over the next five years from 6.2% in the past five.

The slowdown signals that dollar stores are entering a new phase. As its rapid momentum slows, the industry must draw more of its growth from improving the performance of its existing stores. "I wouldn't yet characterize the [industry] as mature -- but probably at the peak of its growth cycle and on the cusp of maturity," said Sandra Skrovan, a Retail

Forward vice president. Investors have mostly voted with their feet so far. Share prices of

Fred's Inc. have swooned to $12.04 at yesterday's close on the Nasdaq Stock Market from around $30 in early 2004. The stock of 99 Cents Only Stores sunk to $10.11 a share on the New York Stock Exchange from the high $20s in the same span. Dollar Tree Stores

Inc. closed at $22.97 yesterday on Nasdaq, down from the low $30s. Family Dollar

Stores Inc. closed yesterday on the Big Board at $20.49 a share, down from the high


$30s. Even the industry's largest and strongest company, Dollar General Corp., has seen its stock price, which closed yesterday at $18.77, mostly flat since early 2004.

The news isn't getting any better. Some dollar-store operators revised their earnings-pershare forecasts late last month for their current fiscal year. Dollar Tree, of Chesapeake,

Va., lowered its forecast to $1.57 to $1.66 from $1.77 to $1.87. Fred's, of Memphis,

Tenn., which offers pharmaceuticals as well as discount goods, lowered its forecast to 74 to 79 cents from 84 to 89 cents due to high gasoline prices and cuts in its home state's

Medicaid program. "We expect our core customer's discretionary spending to continue to be pressured by high gasoline prices and unemployment," David Perdue, chairman and chief executive of Dollar General, told investors in an Aug. 25 conference call.

21. The red-hot growth of "dollar stores" is ________________. a. getting hotter b. doubling c. going global d. cooling Correct

How American Lenders Shelter Themselves

By RUTH SIMON and JAMES R. HAGERTY


Big U.S. mortgage lenders are selling most of the riskier loans they have been making, and some are finding other ways to protect themselves from the possibility of a surge in defaults once the housing market simmers down. Lenders have long sold all or most of their standard mortgage loans to packagers of securities backed by these assets. But when it comes to riskier loans, some investors like to see lenders retain a large amount of exposure, so that both lenders and investors have skin in the game. One of the fastestgrowing and riskiest types of home loans is the option adjustable-rate mortgage, or option

ARM. These loans give borrowers several payment choices each month. Borrowers who elect to make the minimum payment can see their loan balance rise, a process known as

"negative amortization." Bank regulators have been raising questions about the risk of these option ARMs. One danger is that some borrowers taking advantage of low monthly payments now -- sometimes as a way to get into homes they couldn't otherwise afford -- won't be able to meet the much-higher payments required later to pay off the loan.

Until a year or so ago, option ARMs were a niche product aimed at sophisticated and well-heeled borrowers who wanted flexibility. Now they have gone mainstream.

Countrywide Financial Corp., the nation's largest mortgage lender, says about a fifth of the home loans it made in this year's first half were option ARMs. In the second quarter,

Countrywide has disclosed, it sold about three-quarters of the option ARM loans it originated and retained the rest. Angelo R. Mozilo, Countrywide's chief executive, acknowledged during a July conference call with investors that it isn't clear how successful borrowers ultimately will be in paying off their option ARMs. So far, borrowers are doing very well in meeting their payments, Mr. Mozilo said, but "you have to wait some time for loans to mature, a year or two years, even three years, to determine how they're going to perform."


Another large lender, Washington Mutual Inc., told analysts during its latest quarterly conference call that it, too, was selling about three-quarters of its option ARMs. In addition, in the second quarter, Washington Mutual transferred $2.9 billion of option

ARMs out of its long-term portfolio and into the category of loans available for sale.

22. One of the fastest-growing and riskiest types of home loans is the ______. a. option ARM Correct b. ARM c. ATM d. option CAM

In China, That Ivy League Degree Isn't Gold

By REBECCA BUCKMAN


SHENZHEN, China -- China still is a magnet for ambitious, Western-educated entrepreneurs coming home to start high-tech companies and cash in on China's economic boom. Take Charles Zhang, the Massachusetts Institute of Technology-trained founder of Web portal Sohu.com Inc., and Edward Tian, who earned a doctorate in the

U.S. and once charmed Rupert Murdoch into joining the board of his Beijing telecommunications company. But this favored class isn't looking quite so favored, at least in the eyes of venture capitalists looking to invest in China. The trend is largely anecdotal, but for many "seed capitalists" poking around Beijing and Shanghai, slick

Westernized returnees are out. Local, rough-around-the-edges entrepreneurs are in.

"The less English you speak, the better," says David Zhang, a venture capitalist in Beijing with San Francisco's WI Harper Group. He and other investors say locally trained executives often are more thrifty with cash and better understand local Chinese markets -- and businesses that know how to tap them -- than people who have been abroad for years.

"A lot of the returnees, actually, they have lost touch with China," agrees Vincent C.H.

Chan, a managing director at Jafco Asia, part of Jafco Co. of Japan. Instead of courting

Ivy League graduates with slick business plans, Messrs. Zhang and Chan are plowing money into no-frills Chinese start-up businesses such as wireless-services provider China

Broad Media Corp. The company, funded by WI Harper, is the brainchild of Tian Song, an entrepreneur who went to college in Beijing and toiled in the state-owned telecommunications sector there. He says, through a translator, that his only visit to the

U.S. was a brief trip to Las Vegas. Jafco has helped to finance such entrepreneurs as

Zhou Hongyi, who founded Chinese Internet search-engine concern 3721 Network

Software Inc. Yahoo Inc., intrigued by Mr. Zhou's technology -- it enables people to use

Chinese characters to search the Web -- bought the company nearly two years ago for

$120 million. Some returnees may have "studied in a good school," says Andy Yan, managing partner of Hong Kong investment firm SAIF Partners. But "when they come back, they think they know everything." One of Mr. Yan's favorite home-grown success stories is Hu Xiang, a founder of SAIF portfolio company Mobile Antenna Technologies

(Shenzhen) Co. Mr. Hu, 52 years old, is about as far from a polished returnee as one can get in China: He doesn't speak English and missed nearly 10 years of schooling during


the Cultural Revolution that began in the 1960s. Mr. Hu dug tunnels and later was a lowlevel factory worker, sometimes going hungry. That Mr. Hu suffered during the Cultural

Revolution and had to work so hard for his success, instead of leading a more comfortable life abroad, appealed to Mr. Yan. "We've been through so much," says Mr.

Yan, who had similar experiences. "The challenges now don't seem so big."

23. Vincent C.H. Chan, a managing director at Jafco, Asia thinks many Chinese returning from western educations have ______________________. a. great new ideas b. great technical skills c. great financial skills d. lost touch with China Correct

Questions 24 – 26 from Personal Journal, Section D

The Holidome Returns: Slumping Holiday Inn Expands Water Parks

By RYAN CHITTUM

September 20, 2005; Page D1 http://online.wsj.com/article/0,,SB112718145162545781,00.html

Holiday Inn, in a bid to freshen up its fusty image, is bringing back an idea that was a hit with travelers during the Ford administration. The oldest major hotel chain in the U.S. will announce today that it plans to revive the Holidome, its cavernous atrium hotels with indoor swimming pools that served as cheap getaways for families in colder climates.

Holiday Inn has teamed up with a water-park designer to create indoor pools with 32-foot enclosed slides, aquatic basketball, and "mini-geysers." The water parks will mostly be only in newly built Holidomes -- the company is planning to open six by next year in cities including Chicago-Elmhurst, Ill., Coleraine, Minn., and Stevens Point, Wis. At the same time, all 130 existing Holidomes, which typically have regular pools and in some cases mini golf, will get additional water features by 2007. As part of its makeover,

Holiday Inn will also rejigger its Select brand to appeal to thirtysomething travelers, who make up an increasingly large percentage of travelers but tend to gravitate to trendier hotels. Starting next year, the 81 Select hotels will feature a Sporting News Grill restaurant, MP3 clock radios in rooms, Wolfgang Puck coffee -- and feng shui throughout the building to create a "balanced, calming and inviting stay." Even the employee uniforms are getting an upgrade. These moves come as leisure travelers will for the first time this year book more rooms than business travelers, travel consultant D.K. Shifflet &

Associates predicts. While nonconvention business travel still hasn't recovered from its

2000 levels, leisure travel has been growing steadily. For Holiday Inn, reviving the

Holidome is an attempt to capitalize on the surge in the popularity of hotels with indoor water parks, many of which are located in cities where it's too chilly for outdoor swimming most of the year. Great Wolf Resorts Inc., which went public late last year, has seven huge indoor water-park resorts in the Midwest and Virginia. It is currently building five more, one of which will open next month in Pennsylvania's Pocono

Mountains. "There is a lot of demand from consumers for these waterparks," says Will


Marks, an analyst with JMP Securities in San Francisco. There are some signs that the field of hotels with water parks may be getting crowded. Great Wolf's shares have tumbled recently on concerns of unexpected competition in some of its markets. But

Holiday Inn says it is sees opportunity. A study commissioned by the chain found that hotels with indoor water parks have occupancy rates up to 20 percentage points higher than those without them, and with rates that are $28 higher. Holiday Inn founder

Kemmons Wilson launched the roadside-motel chain in the early 1950s just as a newly flush American middle class was taking to the road on the burgeoning interstate-highway system that revolutionized motor travel in the U.S. At a time when most motels were mom-and-pop operations, Mr. Wilson's idea was to make every Holiday Inn the same so travelers would know what to expect. To attract families with children, one of the standard features was a swimming pool.

24. Holiday Inn, in a bid to freshen up its fusty image, is bringing back the

_______________. a. in-door play ground for young children b. in-door roller rink c. Astrodome d. Holidome Correct

An Early Look At Next Year's Taxes

September 21, 2005; Page D1

By TOM HERMAN http://online.wsj.com/article/0,,SB112726556478946940,00.html

An early look at income tax changes for next year shows that most Americans will get some modest relief. Each year the Internal Revenue Service adjusts its tax tables and many other items to take inflation into account. The IRS doesn't typically issue the official revisions until later in the year, but calculations by three tax specialists, making use of new inflation data from the government, indicate that taxpayers will benefit from slight increases in the basic standard deduction, the personal exemption and other key items. The changes will apply to income received in 2006. On top of the inflation adjustments, millions of upper-income taxpayers will get additional breaks next year, when parts of President Bush's tax cuts are scheduled to take effect. The changes, enacted by Congress in 2001, will allow many high earners to take more itemized deductions and personal-exemption amounts than under current law. For many taxpayers, another important adjustment is an expected change in the gift-tax exclusion. The annual gift-tax exclusion for 2006 is likely to rise to $12,000, according to the tax specialists, after having remained stuck at $11,000 from 2002 through this year. Generally, this represents the maximum amount you can give away to another individual without having to report it to the IRS. The increase would be welcome news for people seeking to reduce the size of their estate by making tax-free gifts to children or grandchildren, or other recipients.

How much savings individual taxpayers get from the inflation adjustments depends on their income, deductions and other key details of their returns. But a hypothetical married couple filing jointly, with total taxable income in 2006 of $100,000, will probably pay


$215 less in federal income tax than on the same income for 2005, according to CCH Tax and Accounting. This is a bigger tax saving than last year, when inflation adjustments reduced federal income tax for the same hypothetical couple by $145. Still, what relief there might be for many taxpayers could be undone if Congress doesn't act to curb the growth of the alternative minimum tax. The AMT, originally designed to prevent a small number of high-income individuals from avoiding paying taxes, has hit a growing number of middle-income earners because the levy isn't indexed for inflation. If Congress does nothing, the AMT will hit more than 20 million Americans in 2006, up from about

3.8 million this year. Many tax advisers believe lawmakers will enact at least a temporary patch to slow the AMT's growth. The inflation adjustment calculations were done by

George Jones of CCH, William E. Massey of RIA, and James C. Young, associate professor of accounting at Northern Illinois University. RIA, of New York, and CCH, of

Riverwoods, Ill., sell tax and other business information. Their projections have proven highly reliable in the past, and they may help many people with tax-planning strategies.

The annual changes are based on consumer price index figures from the Labor

Department for the 12 months through August, released last Thursday. The official IRS numbers could differ from the projections if the Labor Department revises its report.

The basic standard deduction for married couples filing jointly is expected to rise for

2006 to $10,300 from $10,000 for 2005, according to the tax specialists. For most singles and married taxpayers filing separately, the basic standard deduction will increase to

$5,150, up $150, they say. The personal exemption amount will rise to $3,300 from

$3,200.

25. A hypothetical married couple filing jointly, with total taxable income in 2006 of

$100,000, will probably pay $_________ in federal income tax than on the same income for 2005. a. 215 less Correct b. 215 more c. 2150 less d. 2150 more

Beyond the Prenup

By RACHEL EMMA SILVERMAN

September 22, 2005; Page D1 http://online.wsj.com/article/0,,SB112735445722148247,00.html

Wealthy families and individuals are increasingly looking beyond prenuptial agreements to shield property from future divorce claims. The main goal is to make sure inheritances, and other assets accumulated before marriage, are kept separate from marital property, which a judge can divvy up if a couple divorces. Protecting wealth from the financial ravages of divorce has long been a key concern of families, who often enlist lawyers to draft a detailed prenup spelling out what's his and hers before the wedding invitations are sent out. But wealth managers are increasingly trying other strategies -- especially the creative use of trusts, which can be effective in sheltering assets a spouse has earned before the marriage or will inherit. Using multiple, premarital asset-protection techniques, including trusts and prenups, can also be helpful if one of the strategies falls


through. And since divorce judges have wide discretion in carving up property, that's always a danger. Legal advisers say parents of prospective brides and grooms often show the most interest in premarital trusts, because they don't want to see family wealth dissipate because of divorce. Families have also grown more comfortable in recent years with using trusts for tax planning and asset-protection purposes. Also, a growing number of states have loosened their trust laws to allow trusts to last longer and be better shielded from creditors. A chief attraction of premarital trusts, lawyers say, is the fact that they can be set up without the future spouse's knowledge. Many wealthy individuals choose to forgo a prenup altogether, for fear that it will dim the ardor of romance -- and for them a premarital trust is a good alternative, says Mario Mata, a lawyer with Cantey & Hanger in

Dallas. He says the majority of prenups he drafts for clients are never even signed. "They never take it out of the envelope," he says. "They didn't have the guts." Premarital assetprotection tactics can be as simple as scrupulously maintaining separate bank and securities accounts. They can also be mind-numbingly complex, such as combining offshore family limited partnerships, which are popular estate-planning tools for family businesses, with offshore asset-protection trusts, located in places with special laws that make it tough for U.S. creditors to reach trust assets. The cost of setting up these morecomplicated offshore plans ranges from about $45,000 to $125,000, says Chicago lawyer

Thomas J. Handler, who says he has set up such structures for a growing number of his wealthy clients. On top of that are administration and accounting fees that can run several thousand dollars annually, and asset-management fees of about 1% on the assets placed in trust. A domestic trust can cost less -- typically about $5,000 to $10,000 in attorney's fees, depending on the complexity of the arrangement, plus annual fees. The cost of a prenup varies widely, depending on the type of assets involved and the extent of negotiations. A simple agreement starts at about $1,000, but prenups involving complicated family businesses and multiple residences can end up costing tens of thousands of dollars in lawyers' and appraisers' fees. Of course, no strategy to protect property from divorce is bulletproof. Divorce and trust laws vary markedly by state, a particular problem as families move or maintain different residences. What's more, family court judges often have wide latitude in dividing up marital property. For instance, one spouse's trust holdings could influence a judge to award more support or a greater share of assets to the other spouse. In some cases, a judge also could tap trust assets for alimony payments.

'Belts and Suspenders' Approach

The safest bet, say advisers, is to combine asset-protection structures with prenuptial agreements -- what lawyers call the "belts and suspenders" approach. While trusts may shield premarital assets or money that comes from a spouse's parents or grandparents, they may be less effective in divvying up property earned or acquired during marriage.

Prenups, in turn, spell out exactly how assets, especially what's obtained after marriage, should be divided in case of divorce or death. They also have the advantage of promoting open discussion among couples about finances. But prenups might not hold up in court if drafted improperly or if the couple's circumstances change greatly after being signed.

Premarital planning tactics vary depending on whether the assets in question were generated by the bride or groom or their parents. If it's the parents that are wealthy, advisers recommend that they leave gifts or inheritances to their children in trust, rather than outright. In general, inherited property and gifts, even those received during


marriage, are considered out of the marital estate, but income and appreciation may not always be. When parents transfer family wealth into trusts, that property is segregated into its own bucket, clearly outlining what's inherited or given and what's not. By contrast, says New York lawyer Arlene Dubin, a gift or inheritance deposited into a bank account runs the risk of being subject to division at divorce, if it's commingled with marital assets such as a joint tax refund or even a paycheck.

26. Many wealthy individuals choose to forgo a prenup and instead setup a(n)

__________ as they can be set up without the future spouse's knowledge. a. premarital trust Correct b. Post Nup Plan c. Anti PreNup Plan d. premarital savings 501 plan


The Wall Street Journal Weekly Quiz

The Wall Street Journal Education Program

Weekly Review & Quiz

Covering front-page articles from September 17 – 23, 2005

Professor Guide with Summaries Fall 2005 Issue #5

Developed by: Scott R. Homan Ph.D., Purdue University

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The Wall Street Journal Education Program

Weekly Review & Quiz

Covering front-page articles from September 17 – 23, 2005

Professor Guide with Summaries Fall 2005 Issue #5

Developed by: Scott R. Homan Ph.D., Purdue University

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