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In a Challenge I'm assuming his dogs count as seperate rank and file troups for the purposes of who fights or not. Also, with the dogs I'm assuming they move like a rank and file unit since he is not specified as fast cav.
Correct, the dogs don't fight in a challenge. Ridden mounts do, but there are neither mounts nor ridden.
About your second question, that seems right, too. It also seems kind of silly, but what do you do?