The substitution reaction of Fe$(CO)_5$ by ethylene has been studied for plausible intermediates by means of extended Huckel calculations. Among various reaction mechanisms the favorable reaction pathway is via a dissociative mechanism in which ethylene approaches to Fe$(CO)_4$ unit. For Fe$(CO)_4$ fragment, the square planar conformation is found to be the most stable form by the extended Huckel calculations. Our calculations show that ethylene attacks square planar intermediate formed by removing one carbonyl from Fe$(CO)_5$ and then the unstable species thus formed is distored to the most stable trigonal bipyramid with the ethylene lying in the equatorial plane.