Library of Formatting Examples:Small Caps/14A

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CHAPTER III.
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HOW G, B AND K COMPANIES WENT TO SOUTH FRAMINGHAM.
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While the naval militiamen of Springfield were being
sent off to their places of duty amid the
cheers of the people plans for the mobilization of
the land forces of the state were going on apace.
The call of President McKinley for troops was issued on
April 23 and six days later on April 29, Col. Embury P.
Clark of the Second Regiment of Infantry, M. V. M., was

Drop capitals

Treat an illustrated drop-cap or a regular drop-cap like a plain, capitalized letter. Don't indicate it with an [Illustration] tag, and make sure the first word in the body of a chapter is in normal mixed-case, not in small-caps or all-caps.

Unless the project comments request other ways of formatting illustrated letters, just follow the guidelines, as explained here.