The mechanism of the recently developed palladium-catalyzed ene-yne coupling has been evaluated by DFT methods. The calculations validate the previously proposed reaction mechanism and explain the stereoselectivity of the reaction (exclusive formation of the E isomer of the disubstituted alkene). Concerning chemoselectivity, the calculations also clarify why the ene-yne coupling is able to dominate over plausible alternative reaction pathways such as alkene homocoupiing and alkyne polymerization. The role of the phosphine ligand at various stages of the catalytic cycle has also been delineated.