Suppose company ABC generates cash flows of either $1600 mln or $1000 mln depending on whether the economy is strong or weak in one year. Both states of the economy are equally likely. The current risk free rate is 5% and the cost of equity if the company is 100% equity financed is 12%. Assume a perfect market.

a. What would be the cost of debt if ABC borrows $1050 mln.

b. What would be the cost of equity if ABC borrows $1050 mln.