"Te" is a form of "you" that marks it as an object (in this case the indirect object, something like 'for-you'). The subject form as in "You prepare something" would be "Tu." Preparo is the first person singular present tense, so it would literally translate to "I prepare." The verb form is marked for first person, so the word 'yo' becomes optional and is dropped here. So, literally, "I prepare for you a bowl of hot milk with honey?" The rising intonation is enough to change this from a statement to a suggestion. The direct equivalent of "Do you want", "Quieres que te prepare un vaso...," is also acceptable, but note that construction uses the subjunctive "prepare" rather than the present "preparo."
@robarb has given you a full explanation, just think of it as "Can I make a glass of hot milk with honey for you (the "te" bit)? or "Can I get you a glass of ....... honey?" (without the "te" bit translated).