Cures, a leading research-based pharmaceutical company, has 1.5 billion shares traded at a market value of $8 per share, and $3 billion in book value of outstanding debt (with an estimated market value of $3.2 billion). The equity has a book value of $8.8 billion, and the stock has a beta of 1.20. The firm paid interest expenses of $120 million in the most recent financial year, is rated AA and paid 40% of its income as taxes. The 10-year government bond rate is 5.25%, and AA bonds trade at a spread of eighty basis points (0.8%) over the Treasury Bond rate. Assume equity risk premium is 6%.

1. (a)[4 marks] What is the company's current cost of capital?
2. (b)[5 marks] Assuming now the company is planning to issue more debt and increase its debt-to-capital ratio to the industry average of 50%. As a result, the firm's credit-rating will be downgraded to A which has an estimated default spread of 1.10%. What will its new cost of capital be?