You shouldn't be anywhere around cigarette smoke. It's more dangerous second hand. Tell your friend exactly what you wrote. You will not watch them smoke, period, no excuses needed. Smoking around non-smokers is unacceptable. Sorry about your grandma.
I suggest that you inform her of the effects and also what your grandmother is going through. Do this at a time when she is calm and sober, ensuring that you are as friendly as possible. Once you do this, let her decide on what to do as you have already done your part which is warning her.
Tell her how you feel. Of course its her life, but dont buy into the hype: a real friend Will try to influence their friend's choices because we love our friends! Furthermore, just by telling her about it, you cant forc her to stop anyway--but it just might help.