Step 1Heat the oven to 350 degrees. Spread the coconut on a baking sheet and lightly toast, stirring often, 10 minutes. Set aside 1/2 cup for topping the cake.
Step 2Butter and flour 3 (9-inch) round cake pans.
Step 3Place the cake mix, eggs, pudding mix, water and oil in a mixing bowl. Mix at medium speed until the batter is thick and smooth, 4 minutes. Fold in the walnuts and 1 1/2 cups of the coconut. Divide the batter evenly among the pans.
Step 4Bake the cakes until a toothpick inserted in the middle comes out clean, 30 minutes. Cool completely in the pans, then turn the cakes onto a wire rack.
Step 1Combine the cream cheese, vanilla and milk in the bowl of an electric mixer. Gradually add the powdered sugar while mixing. Continue to mix until smooth.
Step 1Spread 1/3 of the frosting on top of each of 2 cakes then stack them. Set the last cake layer on top and cover with the remaining frosting (the sides are not frosted). Sprinkle the top with the toasted coconut.