The synthesis of benzofurans by the reaction of the palladium(II) complex Pd{1-C6H4-2-OCH(CO2Et)-C,C}(bipy) (bipy = 2,2'-bipyridine) with hypervalent iodine(III) reagents [Ph(CHCHR)I]+ has been examined by Density Functional Theory. Results highlight the role of oxidative alkenylation to form PdIV intermediates and the role of initial adduct formation in this process, an annulation process facilitated by PdII, and the role of 'chain-walking' at PdII centres to allow formation of the lowest energy product. Computation (R = Me) allows assignment of an initially formed adduct with a 'PdII → IIII' interaction at -50 °C, and, after oxidative alkenylation of PdII and reductive elimination from a PdIV centre via Ar⋯Alkenyl coupling, formation of a second intermediate with a structure consistent with NMR detection (R = n-hexyl) at -30 °C is obtained. This PdII complex, containing a coordinated alkene group in Pd{1-(RHCγCβ)C6H4-2-OCαH(CO2Et)-η2-CαCβ,C}(bipy), undergoes a 5-exo-trig annulation by forming a Cα-Cβ bond to give a complex with a bicyclic carbon skeleton suitable for subsequent formation of benzofurans. A series of facile rearrangements including chain-walking results in formation of a lowest energy complex of three feasible hydrido(alkene)palladium(II) species, leading to decomposition and release of the observed benzofuran isomer isolated under synthesis conditions. The computational study allows reinterpretation of the NMR data reported previously, in particular the determination of barriers in the reaction pathway allowing assignment of structure for key intermediates.