Preheat the oven to 350 degrees F. Beat the egg whites to soft peaks, while gradually adding 1/2 cup of the sugar. In a separate bowl, beat the egg yolks until thick. Cream the butter with the vanilla and beat in the remaining 1 cup sugar. Stir the egg yolks into the butter mixture and cream well. Sift the flour, baking powder, and salt together 3 times. Add enough milk to the reserved coconut milk to make 1 cup liquid. Alternate adding coconut liquid and flour mixture to the butter mixture. Blend in 1/4 cup of the coconut grating and beat well. Fold in the egg whites. Pour into two 9-inch or three 8-inch layer pans. Bake for 25 to 30 minutes. Frost the cake layers, assemble, and sprinkle with the remaining coconut grating.

Combine the sugar, milk, butter, and vanilla. Cook for about 5 minutes, until the mixture begins to thicken. Mix in the coconut. Frosts one 8- or 9-inch layered cake.