The correct answer is C. Walter says that he cannot do it now.
The sentence “Walter said, ‘I cannot do it now.'” is in the past tense. This means that Walter is not saying this now, but he said it at some point in the past. The sentence also uses the word “cannot,” which means that Walter is unable to do something. In this case, he is unable to do something now.
Option A is incorrect because it says that Walter says that he cannot do it then. This is not true, because Walter is not saying this now. He said it at some point in the past.
Option B is incorrect because it says that Walter says that he could not do it now. This is also not true, because Walter is not saying this now. He said it at some point in the past.
Option D is incorrect because it says that Walter said that he could not do it then. This is not true, because Walter is not saying this now. He said it at some point in the past.